PMIs add to concerns on health of Euro Area economy
This week’s composite PMI at 49.7 in October, served to accentuate fears on the Euro Area’s growth prospects for 2025. In this context, the ECB is expected to revise down its projection for 1.3% GDP growth in 2025 so markets are fully pricing in a further 25bp rate cut at the December 12th policy meeting, the deposit rate then expected to fall below 2% by end-2025. At its root, the weak Euro Area economy reflects the past tightening of monetary policy, but also that consumer spending has not yet picked-up as real household incomes have started to grow again. However, there is growing concern the European manufacturing sector, specifically in Germany, now faces more intense competition from China. The IMF has estimated this competition could reduce Euro Area GDP by 0.3% over the medium term (vs baseline projections). Here, the October 4th decision by EU countries to allow the European Commission impose tariffs up to 35% on Chinese EV car imports will only be a partial panacea. European car producers will still need to compete in important, growing developing markets, including China itself.
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