Eurozone PMIs suggest stronger growth and no inflation pressure

The euro-zone composite PMI rose to its highest level in just under three years in April. PMI composite index amounted to 54.0 in April vs. 53.1 in March, according to the flash estimate. The PMI has now been above the 50.0 level (a threshold separating growth from contraction in business activity) for ten consecutive months. Companies increase employment to expand capacity but growth in economic activity is still not strong enough to generate inflation pressure.

Both the manufacturing and services PMIs increased in April to 53.3 and 53.1, respectively. The composite employment balance was the largest since September 2011 which means that companies believe in sustainable recovery and plans to expand production in reaction on higher demand. This may lead to higher capacity use and suggest higher growth of fixed capital formations in the medium term.

By country, the performance of the euro-zone’s two largest economies continued to diverge in April. German composite PMI suggests economic growth at the level of approximately 0.8-0.9% while French composite PMI points to very slow growth close to stabilization. Peripheral economies got  back on track. In line with PMI data they recorded fastest rate of growth since early 2011.

According to the strategy presented on our website www.growthaces.com we should have long exposure in EUR-USD this month (PMI is above 50 and rising). Are there any risks for such a strategy?

PMI showed that output prices fell for the twenty-fifth month running and input prices barely rose during the month, registering the smallest increase since June last year. Many companies continued to focus on keeping costs low to boost competitiveness. Moreover, at this stage of economic recovery capacity use is still too low to create inflation pressure. The outlook for prices could be the big concern for the ECB that could respond with taking more action than just words. In our opinion, however, the ECB will not decide to ease its policy. There are still fears of deflation but they are typical for early phase of economic recovery. 

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GrowthAces