Macro Weekly
Group Economics
22 July 2016
Eurozone resilient, UK recession • Nick Kounis Head Macro & Financial Markets Research Tel: +31 20 343 5616
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nick.kounis@nl.abnamro.com
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Early post-Brexit PMI survey indicators suggest the eurozone economy is resilient up until now… …though there was a hit to confidence raising risk of weakness ahead Meanwhile, the UK looks to be heading for recession, with the PMI contracting at the sharpest pace since the global financial crisis The ECB is in wait-and-see mode but will probably ease further in September, while we think the BoE will announce a bazooka in August
Eurozone so far resilient to Brexit… Early data suggest that the eurozone economy is coping well in the aftermath of the UK’s vote to leave the EU. However, there were signs that confidence has been hurt, and this may be a future headwind to activity. The eurozone composite (or wholeeconomy) output index dipped only slightly in July (to 52.9 from 53.1 in June). Though it did represent an 18-month low, it is not far from the levels seen for most of this year, with the index being trending around the 53 level. This is consistent with GDP growth of around 0.3% qoq. The indexes reporting on trends in output, orders and jobs remained resilient. …but signs of hit to confidence On the other hand, business optimism in the services sector deteriorated significantly. That index fell to 59.9 in July from 62.6 in June, taking it to the lowest since December 2014. Weaker business confidence, if sustained, could negatively impact decisions on output, orders and hiring in the coming time. So it is far too early to signal the all clear, especially since Brexit is actually seen having an adverse impact via an ‘uncertainty shock’. Only modest growth in prospect Our sense is that the PMI and GDP growth will soften and we expect the economy to grow only modestly in coming quarters. This should leave underlying inflationary pressures extremely subdued opening the door for further monetary easing in coming quarters (see below). Periphery relatively weak Looking at the country breakdown, both the German (55.3 from 54.4) and French (50 from 49.6) composite indexes rose in July. The fall in the overall index for the eurozone therefore suggests that the peripheral economies were hit more
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