Eurozone: Brexit fall-out remains contained (for now) - ING

Peter Vanden Houte, Chief Economist at ING, notes that the composite PMI for the Eurozone declined less than expected in July thanks to the more domestically orientated services sector and while it is still early days, this seems to corroborate the ECB’s wait-and-see stance.

Key Quotes

“After the rather alarmist ZEW-indicator in Germany and a moderate fall of Eurozone consumer confidence in July, today’s flash PMI is giving a first broad impression of the damage the Brexit referendum inflicted on European business confidence. The flash Eurozone PMI composite index indeed declined, but only to 52.9 from 53.1 in June, confounding consensus estimates looking for a bigger fall.

In the typically more domestically exposed services sector confidence fell only marginally to 52.7 from 52.8 in June. The services sector continued to hire, talking on extra staff to the greatest extent since February 2008. The Manufacturing PMI saw a somewhat bigger fall, declining to 51.9 from 52.8 in June, probably already discounting some negative effects from the Brexit referendum. Export growth already slowed actually due to the weakened sales to the UK.

The negative impact of the Brexit decision on Eurozone economic activity runs through different channels, with the most important ones being a loss of competitiveness for Eurozone businesses (especially manufacturing) on the back of the weaker GBP and increased uncertainty, potentially delaying investment decisions. On top of that, reduced demand from the UK might also hurt export perspectives. While sterling has remained weak, the swift formation of a new UK government has reduced volatility on financial markets, which should contain the negative impact on confidence going forward.

Today’s figures therefore corroborate the ECB’s wait-and-see-stance. The bank certainly wants more evidence of Brexit damage to the Eurozone economy before acting again. Even though it is still early days, July’s PMI doesn’t cry out for more stimulus.”