Illustration EcoTV Week du 31/07


Data for the eurozone as a whole continue to improve. The flash PMIs for July were again higher. Manufacturing has crossed the 50 line reaching 51.1, a 19 month high. Services also passed the 50 hurdle, jumping to 55.1, reaching the highest level in 25 months.

Three comments can be made about these levels. Firstly, they point to an expansion of activity, which should not come as a surprise. After all, the ending of the lockdown caused a swift increase in production and demand, a mechanical rebound.  Secondly, a slowing of momentum in the coming months looks inevitable: the data can’t keep on improving as they have done since the trough in April. Actually, in some areas the July increase was already a bit slower than the jumps in May and June. Thirdly, the PMI tells us that respondents assess this month’s situation more positively than last month’s. It doesn’t convey information about the absolute level of activity.

Another striking and welcome development is the improvement in new export orders although the levels in June for the different Eurozone countries were still below those of manufacturing. July saw a significant increase, thanks to a big jump in Germany.

Let’s now focus on the two big ones, Germany and France which together represent almost 50% of Eurozone GDP.

In Germany, the ifo business climate indicator released earlier this week has improved further, marking a third rise in a row. Business expectations are at the highest level since the autumn of 2018. However, the assessment of the current situation, although improving, remains at a very low level, which is in sharp contrast with the PMI. Manufacturing saw a considerable improvement, services saw a strong increase and so did trade. Exporters are also feeling cautiously more optimistic with the car industry a big winner.

In the meantime, consumer sentiment has been improving for three months in a row. Undoubtedly, the temporary VAT cut must play a role.

In France, the INSEE business climate improved further in July, reflecting increased confidence about the outlook but also a better assessment of recent activity. Yet, at 85 the index remains well below the long-term average of 100. Before the pandemic, it was at 105.

Households confidence on the other hand eased slightly in July after rebounding in June.

This week’s Q2 GDP numbers are eagerly awaited. Bloomberg consensus expects a contraction of 12.2%. However, the data will be scrutinized for any hint about what Q3 may bring. For Q3, the rebound, which has already several weeks ago should translate, according to the consensus, in GDP expanding 8.2% on a quarterly basis.

The key question for the second half of the year is how the pandemic evolves. An increasing number of countries see local increases in new cases which have led to tighter measures. This will weigh on certain sectors and, quite likely, on confidence. This is a concern considering that household confidence was flat in July in the Eurozone.

In addition, the pressure towards job shedding continues in the labour market, as clearly shown in the PMI data. In Germany, the latest ifo employment barometer shows some improvement which means that companies are planning to lay off fewer people than before. Such an environment will act as a drag on household spending.

Against this background, the announced and planned fiscal policy stimulus at the national and EU level is more than welcome.

A temporary cut in value-added tax (VAT) in Germany, which will cost the government up to 20 billion euros ($23.17 billion), helped push up consumer morale there more than expected heading into August, Thursday’s data showed.

In France, business confidence gained further ground in July. The INSEE official statistics agency said its business climate index rose to 85, from 78 in June.

That is still far from the 105 recorded in February, before the pandemic, but much better than the record low of 53 reached in April as measures to halt its spread shuttered businesses and kept consumers at home.

The news comes as the European Parliament holds a special session to discuss a European Union leaders’ accord on a massive stimulus package which countries hit especially hard by the coronavirus hope will help rekindle their economies.

Finance Minister Bruno Le Maire said France’s economy was on course to rebound by 8% next year and should return to pre-crisis levels by 2022.

But he also warned that while recent economic data were satisfying, the situation was still “too fragile” to prompt a change to forecasts for an economic contraction this year of 11%, the worst in modern times.

Rolf Buerkl, a researcher at Germany’s GfK institute, said its data showed consumers were increasingly of the impression that the German economy was likely to recover soon and were using the opportunity of the VAT cut to make major purchases.

The consumer sentiment index, published by GfK and based on a survey of around 2,000 Germans, rose to -0.3 heading into August from a revised -9.4 in the previous month.

This was the third monthly increase in a row and beat a Reuters forecast for -5.0.