Europe Week Ahead: BoE Minutes, EZ PMIs, German IFO, French INSEE, UK GDP

Geopolitics will remain in the spotlight next week although barring a new spike in risk aversion European data should influence markets as well. Our above consensus forecasts for Eurozone flash PMIs would be consistent with a pick-up in GDP growth in H2 (and into 2015), from frustratingly low levels in H1. In particular, we look for a rebound in core Eurozone PMI indices this month, following three months of weakness, and we are not only talking about a German World Cup effect. Eurozone M3 and credit aggregates are likely to remain subdued in June although, as the first monthly report post ECB announcements (and a basis for future TLTROs net lending calculations), they will deserve closer attention from now. Meanwhile, in the UK, the MPC minutes are likely to reflect a rising degree of divergence among BoE members as regard the amount of economic slack and the implications for inflation and policy rates.

Eurozone flash PMI indices are expected to bounce back in July, from 51.8 to 52.2 in the manufacturing sector and from 52.8 to 53.3 in the services sector after two consecutive months of decline. Both Germany and France are expected to print a slight improvement in business conditions. The German flash PMI manufacturing is expected to increase in July to 52.4 from 52.0, as we believe that the set-back in the forward-looking components (both output and new orders) was likley temporary. The flash PMI services is expected rise from 54.6 in June to 54.9 in July supported by the business expectations’ component. All in all, the German flash PMI composite is expected to increase to 55.0 consistent with a moderate rate of growth of the economy. After a second quarter of sharp declines (-1.3 point in June), the French composite PMI is expected to rebound by 0.6 point in July to 48.7 from 48.1, thanks to an increase both in the services and in the industry. The services PMI is forecast at 49.0 after 48.2 in June, up by 0.8 point. We expect the manufacturing PMI to grow a bit more slowly, up 0.4 point to 48.6 from 48.2.

In the same vein, the national INSEE survey of the business climate in manufacturing should slightly recover and reach 99 after 98 in June. This modest improvement in business confidence is in line with our forecast of a gradual acceleration of activity in Q314, forecast at 0.3% QoQ after an expected weak growth of 0.1% QoQ in Q214). The corporate investment should improve and the recovery in the Eurozone should trigger exports.

The German IFO business climate is also expected to slightly increase in July at 109.9 after 109.7 in June. The business climate will likely be helped by an upward trend mainly in the manufacturing sector, which will drive upwards the overall index. The assessment on current conditions is expected to stabilise at 114.8 while business expectations could rise at 105.2 versus 104.8 last month. Business conditions remain favourable for many sectors and expectations are more oriented to an upward trend.

UK MPC minutes from the July meeting will be closely scrutinized for clues about the timing of the next rate hike, which remains uncertain and largely data driven. The overall stance of the minutes will likely be hawkish but we do not believe that some MPC members have already voted for a rate hike ahead of the August Inflation Report, which is a key step in the monetary policy decision process. Of particular importance will be any comments on the recent mixed developments on the labour market front, particularly after the June minutes have mentioned that “further work was needed to investigate the differences between the official data and a range of survey indicators, which were significantly stronger”. Contrasting labour market data (slowing earnings’ growth versus tightening labour market conditions) raises the key question whether the BoE would be willing to raise rates without seeing “a sustained rise in real wages”. Divergence of views among MPC members about the amount of slack in the economy means that there is a risk of an earlier-than-expected rate hike based on a split vote, especially if some members tend to give greater importance to the unemployment rate versus wages growth as an indicator of slack in the economy.

UK GDP is expected to have maintained a strong momentum in Q2 and to print a 0.8% QoQ increase (3.1% YoY), a similar performance to the past four quarters. The sustained improvement in surveys during the quarter suggests that the risk relative to our expectation is biased to the upside : the composite PMI rose to 59.0 versus 58.1 in Q1 on the back of stronger business confidence both in the services and industrial sectors. However, we decided not to revise upwards our forecast for this preliminary estimate as hard data in the industrial (manufacturing in particular) and construction sectors were disappointing in May. The strong survey indicators suggest that the drop in industrial production in May (-0.7% MoM) is likely to prove temporary and we expect a rebound in June. Consumer confidence, supported by the improving labour market conditions, also strengthened significantly during the quarter. We expect growth to have been mainly driven by domestic demand, with further expansion to be recorded in household consumption and business investment. Weakness of growth in the main comercial partners and past appreciation of the GBP suggests that contribution from net trade to overall GDP growth likely remained poor. Trade balance in goods and services deteriorated in April and May. All in all, we expect near-term momentum in activity to remain sustained and growth to amount to 3.1% in 2014, followed by 2.3% in 2015.