/Eurozone: PMI falls but still points to strong economic growth – Capital Economics | by Sandeep Kanihama | FXStreet

Eurozone: PMI falls but still points to strong economic growth – Capital Economics | by Sandeep Kanihama | FXStreet

Despite falling in February, the euro-zone Composite PMI remained at a high level and consistent with continued healthy GDP growth in early 2018, explains Jessica Hinds, European Economist at Capital Economics. Key Quotes “This might encourage the ECB to signal before long that it will end its asset purchase programme this year.” “The headline output index declined from January’s near 12-year high of 58.8 to 57.5 in February, a slightly bigger drop than either we or the consensus had expected. Both the services and manufacturing components fell. The continued strength of the euro may well have weighed on the latter as the new export orders index dropped to an 11-month low.” “The Composite PMI still points to an acceleration in quarterly GDP growth from Q4’s 0.6% towards 0.8%. Admittedly, the Composite new orders index dropped in February from 57.9 to 56.5, which does not bode well for March and Q1 as a whole. But even if the headline output index were to fall a bit further next month, then this would still be consistent with growth being sustained at a fairly healthy pace.” “The limited country information available so far showed that the German and French Composite PMIs fell in February. But they remain at a fairly high level and suggest that in both countries, quarterly GDP growth picked up from Q4’s 0.6% to around 0.7%.” “Markit also noted that business activity growth slowed across the rest of the euro-zone. But the euro-zone Composite PMI fell by less than the German and French indices. This suggests that the Italian index (which reached a 139-month high in January) may have held up better than expected and that the Spanish index regained further ground as the crisis in Catalonia has quietened down.” “Meanwhile, the euro-zone Composite output price index remained fairly high, suggesting that the strength of the economy is prompting some inflationary pressure. The index dipped from 54.8 to 54.4 but this is still well above the levels seen since mid-2011. The output price index remains consistent with a rise in core inflation from January’s 1.0% to about 1.5% over the next year or so.” “Overall, with the euro-zone economy continuing to perform very well, we continue to think that the ECB will be comfortable ending its asset purchase programme later this year. But with only limited signs of inflationary pressure and signs that the euro may be denting activity a little, the Bank is likely to strengthen its guidance that interest rates will not rise any time soon.”