Euro area flash manufacturing PMI index falls sharply in December, services PMI rises

The flash manufacturing PMI of euro area dropped sharply in December. The index dropped to 45.9 from prior month’s 46.9, as compared with consensus expectations of a print of 47.3. The manufacturing PMI index in Germany also fell, dropping to 43.4. Only the euro area service sector PMI saw a positive report, with the index rising to 52.4 from November’s 51.9.

Since the summer, the manufacturing PMI has been moving sideways. Other survey-based indicators are also indicating signs of a stabilization, as the ECB noted recently. Nevertheless, the euro area manufacturing PMI only hints an end to the recession and the beginning of an upward trend with an error probability of less than 10 percent when its seven-month average points upwards again. The corresponding average for the German PMI is also indicating downwards, with a 10-month average to be considered here in order to restrict the likelihood of a false signal to 10 percent, noted Commerzbank in a research report.

The fact that leading indicators for the export-oriented manufacturing have been dropping globally since the start of 2018 is greatly because of the trade war of Donald Trump. Since, there, there has been great uncertainty regarding the future world trade order, so that firms are hesitant to invest. In this context, the recent partial agreement between the U.S. and China is positive because it has at least slightly lowered the high level of trade policy uncertainty.

“This ceasefire should continue for the rest of the year because neither the campaigner Trump nor the Chinese government are interested in an escalation of the conflict. We therefore expect the recession in manufacturing to end in the spring”, stated Commerzbank.

Nevertheless, firms are aware of the deep economic, political and military rivalry between the U.S. and China. Moreover, the U.S. Democrats also want to use protectionist means to decelerate China’s rise. Thus, in spite of the recent partial agreement, trade policy uncertainty continues to be high compared to the period before the trade war.

“We therefore expect only an anaemic economic upturn for Germany and the euro zone in 2020. For the euro zone, we expect a plus of 0.9 percent”, added Commerzbank.