Fra BNP Paribas:
Eurozone: Solid surveys and softer hard data for Q3; growth comfortably above trend
The flows of survey data released so far confirm that the eurozone kept expanding at an abovepotential pace in Q3 and it is likely to enter the last quarter of the year with good momentum.
The final composite PMI for activity was confirmed at 56.7 for September, 1pt higher than the previous reading. The index is now just a whisker below the six-year high it recorded in May. The recovery is broad-based among sectors. Solid domestic demand is supporting confidence in the more domestically oriented services sector. Loose financial and monetary conditions, as indicated by strong growth in M1, should continue to support domestic demand over the coming quarters.
The positive effects of robust domestic demand are supporting confidence in the more
export-led manufacturing sector, which does not seem to be suffering from the impact of past euro appreciation. Manufacturing confidence kept increasing in September.
September survey data (considering both the composite PMI for activity and the Economic
Sentiment indicator from the European Commission) are consistent with GDP growth of 0.7% q/q in Q3 (see Chart 1), signalling some upside risk to our GDP growth forecast of 0.5%, slightly down from the 0.6% q/q recorded in Q2.
Note, however, that survey data have tended to overestimate growth of late and hard data have drawn a softer picture than survey data over the past few months. Retail sales fell in the first two months of the quarter, and although we expect a strong rebound in September, they might have declined on a quarterly basis, pointing to a moderation in consumption growth in Q3.
We expect Thursday’s industrial production for August to show healthy 0.9% m/m expansion after July’s broadly stagnant figure. Already released industrial production figures for Spain (1% m/m) and German orders (3.6% m/m), normally a leading indicator for industrial production, were both strong, supporting our forecasts. However, a likely weak reading at the turn of the quarter would inevitably affect the quarterly average, keeping growth below Q2’s 1.2% q/q (Chart 2). Quarterly volatility aside, with GDP growth set to continue expanding well above its potential pace, the output gap should keep narrowing rapidly, putting upward pressure core inflation.
Admittedly, it remains low by historical standards. However, other measures of underlying price pressures are increasing. Our ‘core-core’ index, which includes those components of the ‘traditional’ core measure that are sensitive to the output gap, has been increasing faster than the traditional core index (for more details, please see Eurozone inflation: Measuring up, 3 October). In our view, our core-core indicator will keep trending higher, showing a build-up of further domestic-demand-driven inflationary pressures.
The economic outlook, therefore, reinforces our view that the ECB will continue its exit strategy, announcing in October a reduction in its asset purchases to be implemented in January 2018. The accounts of September’s Governing Council meeting point in this direction. It confirmed that a consensus is building within the council on reducing the pace of the asset purchases at the Strong Q3 survey data…
With above-trend growth, price pressures building ..but softer hard data…
ECB is ready to act …though industrial output likely solid in August
the IMF in Washington
