Carsten Brzeski's blog

Eurozone economy leaves political worries behind (for now)

The Eurozone composite PMI hit a six-year high in April, suggesting the economy is gaining further momentum despite political uncertainties.

The flash Eurozone PMI composite output index increased to 56.7 in April, from 56.4 in March. A new six-year high. At the same time, both the services and manufacturing PMI also hit their highest levels in six years.

Despite continuing political uncertainties, the Eurozone economy is currently enjoying cyclical tailwinds. Most confidence indicators have been on the rise since the start of the year. Although hard data up to now has not entirely matched the optimism shown in buoyant soft indicators, growth prospects for the Eurozone economy remain positive. An interesting feature of the current upswing is that the positive momentum is broadly spread across most Eurozone countries and not only driven by a few strong ones. Two days ahead of the first round of the elections, the French PMI just hit a 71-months high. At the same time, the absolute level of the German PMI remains high, despite today’s April drop.

Today’s PMI data is the last important data batch ahead of next week’s ECB meeting. Next week will only see the Ifo release on Monday, while the release of the European Commission’s sentiment indicators on Thursday will come too late to enter ECB members’ files. In fact, next week’s ECB meeting is one most ECB members would probably prefer to skip if they could. The meeting comes at a time at which the ECB would rather say nothing than giving markets any new pieces of information to speculate about. After the initial excitement about a possible tapering and a more hawkish ECB in the days following the March meeting, the ECB made a lot of efforts to recapture market expectations. Even though we still expect the ECB to give its first signs of tapering at the June or July meeting, it looks extremely unlikely that the ECB wants to steer market expectations in between the first and second round of the French presidential elections. Therefore, next week’s press conference could be extremely brief and differences with the March wording will be very hard to find.

All in all, soft indicators in the Eurozone point to a strong start to the second quarter. Even though on the eve of the first round of the French elections a good portion of caution is recommendable, evidence is piling up that the Eurozone economy could become the positive growth surprise of the year.