Eurozone PMI: Further slide on the cards

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Flash estimates for the Eurozone PMI in May 2011 by Markit, based on more than 80% of usual monthly replies, indicate that growth in both the manufacturing and the services sectors in the Eurozone has moderated. The flash manufacturing PMI fell to a seven-month low of 54.8 from 58.0 in April, while the flash services PMI fell to a five-month low of 55.4 from 56.7.

Both the leading economies in the Eurozone reported marked lower growth in their manufacturing sectors, with Germany’s flash PMI at 58.2 compared to 62.0 in April and France’s flash PMI at 55.0 versus 57.5 in April. Germany’s flash services PMI came in at 54.9 compared to 56.8 in April. Growth in France’s services sector was quite stable, though, with the PMI registering 62.8 compared to 62.9 in April.

Sources: Markit; Plexus Asset Management.

Growth in new orders fell with manufacturing new orders and new export orders leading the way. It seems to me that manufacturers in the Eurozone find themselves in the same overstocked position as their Chinese rivals, because according to Markit, the ratio of manufacturing new orders to inventories has fallen to the second lowest reading since June 2009.

Although my GDP-weighted PMI for the Eurozone based on the flash Markit PMIs in May has fallen to 55.2 from 57.1 in April, it is still consistent with above-average GDP growth of around 3% on a year-ago basis. The smoothed GDP-weighted PMI indicates that growth in the second quarter is currently running at a year-on-year rate of approximately 3%.

Sources: Markit; Dismal Scientist; Plexus Asset Management.

The outlook for the Eurozone’s PMIs in June is not rosy, though. My indicator, the IFO business expectations for Germany, is pointing to a three-month average of 55.7 for my GDP-weighted PMI. From that it transpires that June’s GDP-weighted PMI is likely to drop to approximately 54.8 from 55.2 in May.

Sources: Markit; IFO; Plexus Asset Management.

The slower growth in the Eurozone’s business sectors and overstocking in the manufacturing sector are consistent with what we have seen in China’s manufacturing sector. To my mind it reflects the ripple effect of Japan’s terrible twin disasters on the global economy. It is clear to me that global business and the global economy are now entirely in the hands of Japan’s ability to repair the damage and resume growth. But at this stage a shortage of funds is delaying a rapid recovery.

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