News & analysis

The general theme across November’s flash eurozone PMIs is that the continued slowdown in economic growth is starting to manifest within the labour market.

In France, unused business capacity saw the private sector employment index fall for the first time in 3 years, confirming data from INSEE that suggests the unemployment rate rose in both Q2 and Q3. Furthermore, the continued depletion in backlogs of work in Germany, especially amongst manufacturing firms who have faced a difficult demand outlook for some time now, is also starting to weigh on employment. The pace of job losses in German manufacturing was the quickest in over three years, and although services employment stabilised following marginal decreases in the past two months, the outlook for the German labour market is yet to improve given the economy is set to continue contracting over the coming quarters.

While the latest round of PMIs also exhibited signs of re-emerging inflation pressures, this is less concerning than earlier in the year as underlying economic momentum and labour market tightness has moderated, suggesting the disinflationary trend is likely still intact.

All told, while the German PMI figures provided a welcome boost to the eurozone’s growth outlook, we think it is still too early to become constructive on the eurozone economy and the euro, which is now likely experiencing a shallower recession and not the beginning of a period of reacceleration. Our view is further compounded by the fact that firms are once again able to partially feed higher input costs onto the final consumer, a signal of both stabilising yet weak growth conditions and the need for policy rates to remain restrictive in the eurozone for some time.

The hawks within the ECB are likely to read the latest PMI reports with a level of vindication having warned markets for some time now that the hard part of the inflation battle is still to come, which we tend to agree with. However, tighter monetary policy at the start of 2024 should keep the growth outlook weak, raising the risk that policy has been overtightened and the prospect of a deeper eurozone recession should this lead to a sudden easing in the labour market. As a result, while today’s flash PMIs have provided the euro with a bit of a tailwind, we think it is too early to turn constructive on the single currency at these levels.

In fact, it is notable that despite the uptick in the euro, the 1.10 handle continues to be unattainable. In our view, this is likely to remain the case, unless economic data out of the US continues to point towards earlier Fed easing without raising recession concerns. This is an incredibly narrow path for the data to tread, and as such we think the weakness in the dollar has likely reached its potential for the year.

Today’s PMIs provide a boost for the euro, but 1.10 still seems out of reach 

Simon Harvey, Head of FX Analysis


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