Eurozone PMIs signal significant slowdown

PMIs sharply lower

The flash estimates for the eurozone June PMIs came in weaker than the consensus forecast and also below our own (below consensus) forecast. The services PMI dropped to 52.8 in June, down from 55.5 in May, while the manufacturing PMI dropped to 52.0 from 54.6. The composite PMI, which is a weighted average of the services and the manufacturing PMIs fell to 51.9 in June, down from 54.8 in May. It reached its lowest level since February 2021. At its current level the composite PMI is consistent with GDP growth at a rate of around 0.3% qoq, which is close to the trend growth rate. The details of the PMI report reveal that there is quite some weakness ahead. The output component of the manufacturing PMI fell to 49.3 in June, which is below the 50 boom-bust level and signals contraction in activity. Moreover, the forward-looking new orders component of the manufacturing PMI fell by 4 points to 44.7, signalling a sharp drop in orders and further weakness in manufacturing activity in the months ahead. Although output continues to be constrained by supply chain bottlenecks (both due to the situation in China and the war in Ukraine), the pace of the lengthening of suppliers’ delivery times slowed down noticeably in June, suggesting that the overall pain from delays is moderating. This was also reflected in input and output prices in industry, which continued to rise rapidly in June, but at a slower pace than in May. Turning to the services PMI, the forward-looking new business component fell from 55.0 in May to 51.9 in June. This indicates that the post-pandemic rebound in services consumption is petering out and that only modest expansion can be expected in the coming months. One bright spot is that although the employment components of the manufacturing and the services PMIs also fell in June, they remained well above the 50 boom-bust level, which indicates that employment is still expanding at a solid rate. All in all the PMIs signal a significant slowdown in economic growth, which is in line with our base case for eurozone GDP, although the timing of the slowdown could come earlier than we have currently penciled in. Indeed, the recent decline in Russian gas flows to Europe serves to underline the downside risks to our growth outlook, and this is a topic we will explore in our June Global Monthly published tomorrow. As things stand, our base case continues to be for GDP to expand at a solid rate for the remainder of this year, helped by the easing of supply chain bottlenecks and the bounce in services activity. Subsequently, we see growth slowing to levels well below the trend rate in 2023, with quarterly growth numbers for 2023 of around 0.1-0.2% qoq, which is well below the consensus forecast.