The latest Eurozone PMI numbers for August indicate a composite number rising to 52.1, up from 52 previously and beating the forecast of 51.7. This suggests resilience in the Euro Area economy, despite earlier concerns about the impact of the Iran war on energy situations. Germany's manufacturing sector performed at its best in over four years, contributing to the overall positive Euro Area numbers, even though its composite number was slightly slower than expected but still above 50. Conversely, French business activity saw an unexpected weakening, partly attributed to a heatwave that has hit the country. France has been below the 50 level for several months, and a recent Bloomberg report indicated over 7,000 excess deaths in two successive heatwaves through July 22, with people aged 75 and over accounting for three-quarters of deaths in the second heatwave.
This economic resilience, particularly in Germany, suggests that the Euro Area can perform well even with its second-largest economy (France) struggling and its largest economy (Germany) not as strong as anticipated. The robust performance in Germany allows the European Central Bank (ECB) to consider another rate hike, likely in September, given that inflation is expected to remain around 3% for the rest of the year. If the economy were performing poorly, a rate hike might not be feasible.
However, some analysts, such as those from Morgan Stanley, believe the ECB might hold off on further hikes after September due to persistent headwinds on the Eurozone economy. They note that the strong manufacturing numbers in Germany may not continue due to factors like drought conditions and low river levels. While PMIs impact sentiment and support inflows, they don't significantly change the outlook for European stocks, as the majority of European company revenues are generated abroad. Morgan Stanley's Chief European Equity Strategist noted that European equities are benefiting from moderate inflation, with an 18% growth expectation, as companies are able to pass on price increases and maintain margins. Europe's economy is also facing a larger economic cost, with an estimated $208 billion (1% of GDP) impact this year from extreme weather and energy price increases since the start of the Iran war.
