MARKET MOVER - BNP PARIBAS - Investment Services India

Services also on the slide
The ‘flash’ PMI for the eurozone service sector also
fell much more sharply than expected in September,
sliding from 55.9 to 53.6 – the weakest reading since
February. The deterioration was particularly striking
as the services PMI had fared comparatively well in
the prior few months, supported by developments in
the German economy. The new business sub-index
slumped to 52.5, its lowest level since February.
A rare bright spot in the data was the improvement in
the expectations sub-index for services. It rose to its
highest level since April but, as the improvement in
August’s expectations sub-index did not translate into
a pick-up in activity in the sector in September, we do
not see the rise as very significant.
Weaker H2
The composite PMI’s output index merges activity in
the manufacturing and service sectors and, with the
exception of the period after the intensification of the
financial crisis, it has been a decent real-time guide
to eurozone growth trends.
Having fallen in three of the four months to August,
the composite PMI's output index declined again in
September, to 53.8 from 56.2. This represents the
biggest m/m fall since November 2008 at the height
of the panic over the financial crisis. The current level
of the index is indicative of q/q GDP growth in the
eurozone of less than 0.5% (Chart 3): our forecasts
for Q3 and Q4’s q/q growth rates in eurozone GDP
are 0.5% and 0.3%, respectively, and we appear to
be on track to hit those estimates.
Germany not immune
The star performer of the eurozone growth-wise has
been Germany but there too the 'flash' PMI data fell
much further than expected in September. The PMI
for manufacturing fell from 58.2 to 55.3, its lowest
level since January, with the new orders sub-index
down from 57.6 to 53.0. This is the lowest level since
July 2009 and is twelve points down on its cycle peak
in March.
The orders to stocks ratio of the manufacturing PMI
in Germany also fell sharply, suggesting further falls
in the PMI lie ahead (Chart 4). If past relationships
hold, it suggests that the PMI for manufacturing will
head towards the 50 expansion/contraction
threshold.
The services PMI for Germany, which had done very
well recently, also lost more ground than expected in
September, sliding to 54.6 from 57.2, a seven-month
low. The composite PMI’s output index tumbled to
54.8 from 58.4, indicative of a much reduced rate of
growth in German GDP (Chart 5). The new business
Chart 4: German Manufacturing PMI Breakdown
1.4
1.2
1.0
0.8
0.6
Manufacturing PMI:
Ratio of New Orders to Stocks of Finished Goods
Manufacturing PMI:
Headline (RHS)
0.4
96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
Source: Reuters EcoWin Pro
Chart 5: German Composite PMI & Growth
2.0
1.0
0.0
-1.0
-2.0
-3.0
-4.0
98 99 00 01 02 03 04 05 06 07 08 09 10
Source: Reuters EcoWin Pro
Composite PMI:
Output (RHS)
GDP (% q/q)
sub-index is down by almost five points in the last
two months alone (to 52.6).
One of the principal uncertainties over the German
outlook has been the extent to which the slowdown in
the manufacturing and export sectors would damage
the improvement in domestic conditions. The latest
PMI figures suggest that the service sector may not
be so resilient. We will watch closely the upcoming
Ifo business climate index for the retail sector which,
like the services PMI, had performed surprisingly well
over the summer months.
Best of the rest
September’s ‘flash’ composite output index in France
was down by just one point relative to the August
level, at a still elevated 58.5, helped by a rise in the
manufacturing PMI to its strongest level since May. It
remains indicative of solid growth, though other
surveys are less robust, and we continue to expect a
gradual slowing of GDP growth in France after the
0.6% q/q increase in Q2.
As usual, we will have to wait until early next month
for the full national breakdown of the PMI data. Top
of the list for scrutiny will be the data on the Spanish
service sector. The PMI in that sector has already
fallen back below 50, supporting our expectation of a
double dip in Spain.
65
60
55
50
45
40
35
30
70
65
60
55
50
45
40
35
30
25
20
Ken Wattret 23 September 2010
Market Mover
11
www.GlobalMarkets.bnpparibas.com