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Prospects daily: Euro area manufacturing activities slows in May

Global Macroeconomics Team's picture

Important developments today:

1.  Europe PMI flash estimate points to easing growth in May

2.  Germany IFO investor survey stable in May

3.  Spain starts austerity to reduce deficit

 

Europe PMI flash estimate points to easing growth in May. The preliminary estimate of the Purchasing Managers Index (PMI) for the Euro Zone in May points to a modest slowing of activity, as the headline index slipped from a post-recession high of 57.3 in April to 56.2 in the current month. The slackening of growth was focused in the manufacturing sector, for which the PMI slipped from 57.6 to a three-month low of 55.9 in May. Services PMI continued to improve, moving up from 55.6 to 56, a 33-month peak. The easing in manufacturing during May provides the first evidence that the Euro Area financial crisis could come to weigh upon broader economic recovery in the region. The drop in factory activity was the sharpest in absolute terms since the collapse of U.S. investment bank Lehman Brothers in September 2008.

 

Source: Ifo Institute

 


Germany IFO investor survey stable in May. The business climate index published by the IFO Institute eased from 101.6 in April to 101.5 in May, suggesting that the debt crisis in the southern Euro Zone has thus far not substantially dampened investor sentiment in Europe’s largest economy [see ]. At current levels, the IFO headline index is well above its long-term 96 average, offering some encouragement in the face of the first slip in the investor sentiment index in 14 months. While a weaker euro makes German exports more attractive in foreign markets, austerity measures being enacted across Europe are likely to dampen growth within the Euro Area and curb intra-EU demand for German goods.


Spain starts austerity to reduce deficit. The Spanish government approved a 5% cut in public sector wages today, the first since 1978, in an effort to rein-in in the fiscal deficit. Spain’s deficit was the third largest in the Euro Area during 2009, at 11.2% of GDP; and the government target for 2011 is a 6% deficit.

 


Among emerging markets:

In Latin America and Caribbean, Mexico's central bank kept its key interest rate at 4.5% for a ninth straight meeting, as the economy expanded 4.3% year-on-year in the first quarter on strong external demand that fueled manufacturing recovery. On q/q basis, output contracted 0.4% in seasonally adjusted terms. Industrial production advanced 5.4% year-on-year with manufacturing up 9.9%. Meanwhile services grew 3.8% and agricultural production fell 1.5%. Colombia's industrial output jumped 6.4% year-on-year in March, while retail sales increased 9.3%. Industrial production increased on the back of stronger demand for beverages and basic chemicals.

In Central and Eastern Europe and the CIS, Russia’s foreign direct investment inflows plummeted 17.6% (y/y) to $2.6 billion in the first quarter of 2010, while overall capital inflows advanced 9.3% to $13.1 billion. Portfolio investment inflows almost doubled, according to data from the Federal Statistics Service.

In the Middle East and North Africa, Syria’s economy is projected to expand 5% in 2010, according to the Central Bank Governor, while inflation is projected to ease to 3% in 2010 from 4% in 2009, and from more-than 15% in 2008.