Thursday, 4 August 2016

Eurozone Economy Stays On Track Despite Brexit

In World Economy News 04/08/2016

The U.K.’s decision to leave the European Union hasn’t slowed economic growth in the neighboring eurozone, according to a revised measure of activity for July based on surveys of purchasing managers.
If sustained, the eurozone’s resilience in the face of a vote that creates uncertainty about the outlook for its second-largest export market will lessen the likelihood that the European Central Bank will announce fresh stimulus measures when its governing council next meets in September.
Data firm IHS Markit Wednesday said its measure of private-sector activity, known as the composite Purchasing Managers Index, rose to 53.2 in July from 53.1 in June. The final PMI for the currency area was raised from a preliminary estimate of 52.9, at which level the measure indicated a slight slowdown in July. A reading below 50.0 signals a decline in activity, and a reading above that level indicates an expansion.
“It suggests the region saw little overall contagion from the UK’s ‘Brexit’ vote,” said Chris Williamson, Markit’s chief economist.
The composite PMI is in line with other early indications of Brexit’s impact on the eurozone economy. A survey released by the European Commission last week showed eurozone business confidence picked up in July.
The survey of purchasing managers suggests the recovery is likely to continue over coming months. Businesses hired workers at the fastest pace in more than five years, a sign they expect output will continue to rise.
An immediate consequence of the June 23 vote has been a depreciation of the pound’s exchange rate, which raises prices of goods made in the eurozone more for British buyers and is therefore likely to lead to a fall in demand. Over the longer term, it is unclear whether eurozone businesses will face tariffs when exporting to the U.K. after it leaves the bloc.
The surveys of 5,000 businesses across the eurozone found that while activity in the manufacturing sector slowed, it picked up slightly in the larger services sector.
Similar surveys released Monday and Wednesday pointed to a sharp decline in U.K. activity following the vote, increasing the likelihood that the Bank of England will announce a cut its key interest rate Thursday
ECB President Mario Draghi last month signaled that policy makers are open to providing additional stimulus should the U.K. vote appear likely to throw its efforts to boost inflation off course, but said it was too early to judge whether that would be the case.
But while its immediate impact outside the U.K. appears to have been limited, another member of the ECB’s governing council Tuesday warned that the Brexit vote could yet have a destabilizing effect on global financial markets.
“While financial contagion channels haven’t been strongly operative during the initial post-Brexit period, the gradual crystallization of the prospective new relationship between the U.K. and the EU over the coming months carries the continuous risk of triggering adverse market developments if a ‘harder’ form of Brexit emerges as the more likely final outcome,” said Philip Lane, governor of Ireland’s central bank.
The composite PMIs pointed to a divergence in the growth of the eurozone’s largest economies.
The recovery is increasingly being driven by Germany, where activity grew at the fastest pace in seven months. French activity barely increased during July, while Spain’s composite PMI fell to a 32-month low. If sustained, that divergence would make it more difficult to find a monetary policy that suits both Germany and the rest of the currency area.
Official figures released Friday showed the eurozone economy slowed in the three months to June, having accelerated in the first quarter. The composite PMI and the European Commission’s confidence measures suggest growth hadn’t eased any further as the third quarter got under way.

Source: Dow Jones