MARKET MOVER - BNP PARIBAS - Investment Services India

As recently as April, the index was indicative of a
quarter-on-quarter growth rate of about 0.7%, well
above potential. The cumulative fall in the composite
PMI over the three months since then has been
surpassed only by the fall in the period immediately
after the demise of Lehman Brothers.
If, as is likely, the factors driving the deterioration in
sentiment continue to have an adverse impact, then
there is a high probability that the composite PMI will
fall below the 50 expansion level. This is certainly on
the cards for the manufacturing PMI which, at 50.4 in
July, is only marginally above the expansion level.
The new orders sub-index has been below 50 for the
past two months. The ratio of new orders to
inventories, which is usually a good leading indicator
of the trend, does not suggest that a rebound is
imminent.
The more domestic demand-sensitive service sector
PMI data had initially held up better than those for
manufacturing, pointing to an externally-driven soft
patch reflecting supply chain disruption related to
events in Japan which would probably be temporary.
But the services PMI has fallen sharply recently as
well and is also not far above 50 (at 51.6 in July).
National news
The most striking feature of recent national PMI data
has been the slump in Germany and France – see
the charts on the next page. Their composite PMIs
were above 60 in the spring, indicative of 1%-plus
q/q growth rates, but are now in the low 50s. The
PMIs for peripheral countries are already consistent
with recession, in line with our long-standing forecast
of double dips due to multiple headwinds to growth.
As we have pointed out before, not all of the survey
data in the eurozone have fallen as far as the PMI.
This partly reflects compositional issues. But it also
reflects lags. Some of the other sentiment surveys,
including the European Commission indices, have a
lot of ‘catching down’ still to do (Chart 2). The same
applies for the hard activity data, such as industrial
orders and output, which should follow the leading
indicators downwards in the coming months.
How bad?
Looking back at similar periods of high uncertainty
and market tensions in the past, they have usually
been characterised by weak business investment,
which typically lasts for two to three quarters. In the
current uncertain circumstances, businesses are very
likely to postpone their investment.
We expect to see this in the composition of GDP in
the second half of the year, along with a slowdown in
exports. How deep the slowdown is, and how long it
will persist, will depend on a range of factors, some
internal and some external.
Chart 2: Manufacturing PMI & EC Sentiment
60
55
50
45
40
35
30
25
98 99 00 01 02 03 04 05 06 07 08 09 10 11
Source: Reuters EcoWin Pro
Manufacturing PMI:
New Orders
EC Sentiment: Industry (RHS)
Pivotal to sentiment and firms’ behaviour will be the
success of any measures taken to stabilise markets
including, for example, the possibility of the ECB restarting
its bond purchases.
On the basis that tensions in markets usually elicit a
response from policymakers in the eurozone, albeit a
tardy one, we assume that action will ultimately be
taken to stabilise markets, resulting in positive
spillovers on the real economy. But, with the wider
remit for the EFSF unlikely to be operational until into
Q4, market tensions may persist in the short term.
Consistent with this, our expectation is that growth
prospects will start to improve from late in the year
and into 2012 as the market interventions bear fruit
and the growth environment at the global level also
becomes more supportive. This is obviously crucial
to the export-sensitive economies such as Germany.
A sustained fall in oil prices, which has conspicuously
not been evident despite the down shift in global
growth expectations recently, would also be helpful
given the boost it would give to household real
incomes.
Timing is important. We believe that the underlying
economic fundamentals in the core of the eurozone
are relatively favourable so, if credible policy action is
taken soon enough to avert a downward spiral of
confidence, there is potential for the eurozone to
continue to grow at a decent clip beyond the period
immediately ahead. This is particularly important for
Germany, which does not suffer from the persistent
headwinds to growth (e.g. from a burst housing
bubble or excessive indebtedness) which will weigh
on growth prospects elsewhere in the ‘west’.
But even in such a scenario, a weak carry over due
to a disappointing second half of this year will have a
pronounced effect on growth in 2012. We assume an
upturn next year (as Table 1 shows) but our forecast
is still for growth in 2012 of just 1.0%, a cut of half a
percentage point compared to our prior forecast and
¾ of a point below the market consensus.
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Ken Wattret 4 August 2011
Market Mover
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www.GlobalMarkets.bnpparibas.com