Eurozone PMI drops in April (but less than feared)

Eurozone businesses are seemingly still digesting the full implications of Donald Trump’s ‘Liberation Day’, and the last few weeks of tariff announcements and reversals.

At first glance, it looks like trade tensions fully wiped out the tentative return of optimism in the eurozone. At second glance, however, the picture that today’s PMIs are painting is more complicated.

Headline PMIs follow intuition, sectoral PMIs don't

The April PMI just came in at 50.1, from 50.9 in March, the lowest level in four months. Interestingly, however, this drop was not so much the result of a weaker manufacturing sector and the last three weeks of tariff extravaganza, but rather of weaker services activity. The manufacturing PMI even increased somewhat to 48.7, from 48.6 in March, while the services PMI dropped to 49.7, from 51.0 in March. Forward-looking components, however, point to a further weakening of economic activity.

To make the picture even more confusing, the composite PMIs for France and Germany weakened in April, with both countries now below the 50-threshold and on course for yet another quarter of contraction. Here, weaker sentiment was not only driven by manufacturing but also by services.

Price pressures eased further in April, giving the ECB retrospective justification for last week’s rate cut. In fact, with low price pressures and weakening economic activity, more ECB rate cuts will follow.

ECB will again have to do the heavy lifting

All in all, the April PMIs did not bring the anticipated reaction after three weeks of tariff tensions and uncertainty. In fact, not all puzzle pieces match. While the broader weakening in sentiment in France and Germany is in line with expectations, the fact that the eurozone as a whole saw sentiment in the manufacturing sector even slightly improving is somewhat odd.

As so often is the case, it looks as if traditional survey-based data is reacting with some delay to big events. We wouldn’t be surprised to see a more significant drop in manufacturing PMIs next month. In any case, previous eurozone optimism is crumbling and fears of disinflation and stagnation have returned.

The only good thing about the current situation is that it is mainly man-made and could be easily reversed. However, until it is, it will again be up to the ECB to do the heavy lifting in the eurozone. The announced and intended fiscal stimulus in Germany, as well as European efforts to increase defence spending, will take time to substantially boost economic activity in the eurozone.

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