Euro-Area Economy Sees Silver Lining as Growth Momentum Picks Up

(Bloomberg) -- The much awaited rebound in euro-area growth momentum may have finally begun.

A gauge measuring private-sector activity unexpectedly increased in June, suggesting the economy is gathering pace after a slow start to the year. With output strengthening in the bloc’s two largest economies, Germany and France, the numbers underpin the European Central Bank’s prediction that a rebound is on the cards, even if it arrives later than expected.

Japan’s manufacturing sector also strengthened in a sign global economic prospects remain favorable. A gauge for the U.S. is due later on Friday.

But the better figures comes amid the shadow of a looming trade war, with the U.S. and Europe announcing tit-for-tat tariffs on products, and Daimler AG saying that profit will suffer as a result. Policy makers including ECB President Mario Draghi issued warnings this week, while multiple other central banks have singled out protectionism as a threat to the outlook.

Despite that, ECB officials decided last week that it’s time to unwind crisis-era stimulus. A day after the Fed raised interest rates for the second time this year, European policy makers announced they will end bond purchases by December, trusting that heightened global uncertainty won’t derail growth.

What Our Economists Say:

“The euro-area composite PMI survey suggests the economy is continuing to expand at a healthy pace. We view it as pointing to a rebound in GDP growth from the slowdown in 1Q, especially after the headline rose for the first time since January. The ECB is likely to see confirmation in the report that it made the right decision.”

--David Powell and Jamie Murray, Bloomberg Economics. Full report here

The euro area’s composite purchasing managers’ index climbed to 54.8 in June from 54.1 in May, according to IHS Markit. The median estimate in a Bloomberg survey was for a drop to 53.9. The increase was driven by services, while a slowdown in manufacturing persisted.

Growth in the region slowed to 0.4 percent in the first quarter from 0.7 percent at the end of last year. The ECB predicts quarterly expansions of 0.5 percent through the end of 2019, and Draghi said last week that the recent “soft patch” may last longer, but that didn’t change the view of underlying momentum.

Markit’s report showed that business expectations fell to a 19-month low in June, while factory orders rose the least in almost two years.

“The details of the survey warn against any complacency,” said Chris Williamson, chief business economist at Markit. “While the June upturn provides some hope that the weakening of official data earlier in the year may have overstated the region’s weakness, the risks remained tilted towards a further slowdown in the second half.”

©2018 Bloomberg L.P.

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