Euro Area indices from PMI/Markit surveys were higher in May. The manufacturing sector momentum is improving even if the global index for the Euro Area is still below the threshold of 50 that separates improvement and deterioration. But stronger trade between countries as it can be seen in May is a condition for a better outlook. That’s the new and important issue.
But look at these different points
For the Euro Area, May index is higher than April’s at 48.3 versus 46.7. May index was revised up from the flash estimate. In Germany and France there were also upward revisions. This improvement can be seen in the chart below. We also see that for other countries of the Euro Area profiles are better shaped now.
The most interesting country here is Spain as its index, after a long period of divergence, is converging to the Euro Area level.
The most relevant indicator is new orders. All indices for the Euro Area are upward trending. Here again the Spanish index is particularly strong.
This renewal in New Orders can be seen through the New Orders to Inventories ratio. It has been revised up since its first estimate. It is now slightly above unity. This means that inventories are almost not large enough regarding demand and that production will have to increase. That’s the message from the chart below.
But the most interesting is the chart on New Export Orders. There is a strong rebound in most of the indices. This means that trade between Euro countries is resuming. This situation could be a catalyst that could drive higher activity in a foreseeable future. Spain is strong again but the strongest country is Italy. Are countries from the south becoming the most dynamic? That could be interesting and would help to rebalance the Euro Area.
The trade momentum between Euro countries is probably the key to Euro economic outlook for the coming months. Looking at the European business cycle, higher trade is usually a very good starting point.
If something positive can be expected, we have to expect that economic policy will not be too tight. In the past, in France, tighter policies started after the beginning of the recovery. We can hope that governments will be patient
Special case for France
In all the charts above France is behind the curve. Momentum in Spain or in Italy is not seen in France. Nevertheless there is an adjustment that has started between demand and inventories as New Orders to Inventories ratio is up at 1 in May. This could lead to higher manufacturing production in the coming months. Economic policy has to favor this coming stronger momentum. It will not be an easy game.