EU Preview: German and Euro Zone PMIs Expected to Decline in August (Repeat)

(CEP News) Frankfurt - Ahead of Markit Economics' release of German manufacturing and services purchasing managers' indexes, economists and market participants are expecting declines in both indicators. The median consensus forecast is calling for the manufacturing PMI to reach 50.5 in August, down 0.4 points from July's level. Meanwhile, the services indicator is likely to slip one full point to 52.0 from July's 53.1 figure. Although the majority of economists are still expecting the German manufacturing PMI to remain above 50, Danske Bank chief analyst Allan von Mehren is forecasting a drop in the index all the way down to 49.5, one full point below the consensus forecast and into contraction territory. "Basically, if you look at German indicators at the moment: factory orders, German Ifo, they all point to economic growth close to recession levels," von Mehren said. "We've seen a high correlation historically between the German Ifo expectations index and the German PMI for manufacturing and we saw a huge drop in Ifo expectations in the latest reading. So, I think we will see German PMI come down in the coming months." In July, the German Ifo expectations sub-index had declined to 90.0 against forecasts of a 93.2 print for July. The previous month had recorded an expectations level of 94.6, revised down from the 94.7 figure previously released. Meanwhile, June's factory orders decline marked the seventh month in a row where orders' levels had fallen in Germany, increasing the speculation of a recession in the country. Conceding that the 50 mark was important from a psychological point of view, von Mehren acknowledged that the markets would certainly take notice if his forecast did in fact come to pass. "Going below 50 in Germany would really emphasize that the European economy was having problems," von Mehren said. "We could see a bit lower yields and a weaker euro on the back of that." Turning to the services PMI, Von Mehren is expecting a fall to 51.0 for the month. "In general, the services PMI tend to be on a higher level on average," von Mehren said, adding that it usually took a great amount of negative data to push the indicator to a sub-50 level. Despite the arguments for a fall in the manufacturing indicator, Lloyds TSB economist Kenneth Broux has pencilled in a rebound and expects the PMI to rise to 51.1 in August. "The fall in last month's manufacturing PMI was probably a bit exaggerated," Broux said. "It would be a big surprise to see a further fall and not to see a rebound." However, Broux was quick to stress that the improvement would come via the business expectations component of the PMI, rather than from the current business conditions. "Between the two, I think that [there] will be some further stagnation in current business conditions as orders in Germany have leveled off. Expectations I would expect to improve on the back of lower oil prices and a cheaper euro." Maintaining his optimistic outlook, Broux is also forecasting continued growth in the services PMI to 53.3 for the month. "Certainly the decline in oil prices, energy prices in general, and the euro will help to underpin confidence in the services industry," Broux said. Although, he did acknowledge that his optimism was more due to the likelihood of a consolidation in the services sector rather than renewed confidence. Nevertheless, Broux stressed that, despite the gloom in the financial sector, he was much more optimistic regarding the non-financial area, including the services sector. "I think that we have to make a distinction of what's going on between the financial and non-financial sectors," Broux said. "I would expect sentiment to stay under pressure/pessimism to stay relatively high in financial areas. But the non-financial areas are still not doing too badly." "I think that activity is still expanding in that area, input prices are probably coming down a bit. I'm generally quite positive for that sector." Following the release of the German PMI data, Markit Economics will also publish its advance estimates of the euro zone manufacturing and services PMIs. Economists are forecasting further declines in both indicators, with manufacturing expected to fall to 47.0 from July's 47.4 level, and services predicted to come in at 48.0, down 0.3 points from the previous month. Despite the recent fallback in oil prices and the euro, RBS economist Gareth Claase is calling for a further fall in the euro zone manufacturing and services PMIs for August to 46.9 and 47.8 respectively. "The lower oil price and lower euro will help manufacturing and services," Claase said. "But, it's very unlikely that we are going to get an immediate reaction in August." Claase also highlighted the negative momentum of both manufacturing and services going into the third quarter of 2008, with indicators pointing to the contraction in the economy in Q2 possibly spilling over into the next quarter. "The economy decelerated going into July, orders have come off quite sharply, especially for Germany," Claase said. "And it has been confirmed that almost all G8 countries either contracted or are on the edge of contraction. So, this rapid slowing in demand across the globe we think will probably intensify over the next few months, and definitely in August. That's why we think (this month) is going to be worse." By Todd Wailoo, twailoo@economicnews.caThis email address is being protected from spam bots, you need Javascript enabled to view it , edited by Sarah Sussman, ssussman@economicnews.caThis email address is being protected from spam bots, you need Javascript enabled to view it CEP Newswires - CEP News © 2008. 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