Euro area PMIs to soften in August

Euro area manufacturing PMI should soften from 52.4 to 51.6 in August, with only France eking out a small gain in its manufacturing PMI compared to its low reading in July. The services PMI should increase from 54.0 to 54.1 on the back of small rises in the estimates for France and Italy. The composite PMI is expected to show a modest decline, from 53.9 to 53.6. Confidence in the manufacturing sectors in Germany and France is struggling to take off. This likely reflects weaker Chinese import demand, heightened uncertainty (Greece/China) in Germany and insufficient progress with reform in France. 

These PMI levels would be consistent with GDP growth in the range of 0.3%-0.45% qoq, close to the Q3 GDP forecast (0.4% qoq). It is worth noting that, although the Q3 growth forecast for the euro area stands slightly higher than in Q2 (0.4% qoq vs. 0.3% in Q2), falls are not expected in the manufacturing PMI in almost all countries. This is mainly because manufacturing PMIs have reached an upper bound given the historic relationship between PMIs and economic growth. 

PMIs are expected to hover around current levels in the coming months, with modest potential for upside surprises. The current recovery in the euro area comes on the back of lower fuel prices, which have boosted households' disposable income. The fall in the oil prices over the last couple of weeks is a positive in that sense and should further support the demand-led recovery. Exports also started to respond to the euro's weakness in Q2, but the contribution to GDP growth from net exports is expected to be modest. 

The weakness in the euro will help boost export market shares, but the gains cannot entirely offset the weakness in global trade. In particular, the flow of news from China should have some negative effects on PMIs going forward. As a reminder, China represents around 6% of total euro area exports, which amounts to around 1.3% of euro area GDP.