AXA IM: Green shoots of recovery are emerging in the Euro area
Gilles Moëc writes in his latest Macrocast that some some 'green shoots of recovery' are emerging in the Euro area. The composite PMI rose to 51.4 in April, the second month in a row in expansion territory after 8 months of contraction.
Moëc adds: 'Services are leading the way. This would vindicate the ECB’s belief in what would be essentially a domestically led recovery. In a way, Europe would now benefit from some of its rigidities, i.e., the stickiness of wages. Indeed, while nominal wages have started to decelerate – this was the message from negotiated wages in Q4 2023 and real-time indicators suggest this has continued into the beginning of this year – they are now outgrowing consumer prices, freeing up purchasing power and lifting consumption.'
Moëc stresses the importance of caution due to the PMI survey’s recent poor performance in predicting GDP growth. 'For Germany, cross-checking the PMI message with the IFO survey provides some reassurance, since both indicators point to an improvement, but the level of activity remain depressed in German services according to IFO, with a reading for April still one standard deviation below the long-term average (see image below). For France, the message is even divergent. The PMI points to a sharp rebound from depressed territory – the latter at odds with still positive GDP growth in the second half of last year – while the INSEE survey, which had remained close to its long-term average in the services sector, has softened in April.'
Gilles Moëc writes that AXA IM agrees with the scenario of a continuation in the improvement in purchasing power, the effect of this on consumption will be compounded by the resilience in employment prospects helping to avoid another hike to the savings ratio. “Yet, we think the current surveys do not yet take the full account of the more restrictive fiscal stance which is taking hold across the Euro area. GDP growth for Q1 will be released this week and we expect a slightly positive reading (0.1% qoq), but we are reserved as to the extent of any subsequent acceleration” Moëc emphasizes.
'True, those fiscal, domestic headwinds may be offset by an improvement of external demand as the global manufacturing cycle turns. Bundesbank President Nagel in a speech last week expressed his confidence in such outcome, and better than expected readings for industrial production at the beginning of 2024 in Germany may be indicative of a turnaround. We explored in Macrocast a month ago the encouraging signs coming from orders to Taiwan – the world’s biggest producer of chips, and hence a leading indicator of global activity in manufacturing - and more generally it may simply be that the payback from the surge in spending on manufacturing during the pandemic has finally run its course.'