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Tilney Smith & Williamson comment on July Eurozone and UK PMIs

Following the release of July Eurozone and UK PMI data, Daniel Casali, Chief Investment Strategist at Tilney Smith & Williamson comments: 

What happened?

The July flash composite (manufacturing and services) Eurozone Purchasing Managers Index (PMI, an early read on economic growth) rose to a 21-year high of 60.6 (consensus: 60.0) from 59.5 in June and a pre-Covid-19 level of 51.6 in February 2020. Broken down, the manufacturing component came in at 62.6 versus 63.4 in June, while services rose to 60.4 (a new cycle high) from 58.3 last month.

Elsewhere, the July UK composite PMI fell to 57.7 from 62.2 in June, with manufacturing easing to 60.4 from 63.9, and services down to 57.8 from 62.4. 

What does it mean?

Arguably, there are three broad messages from today’s July PMI data.

First, while there are market concerns about peaking growth in China and the US, the uptrend in the Eurozone composite PMI implies that the region is still in the recovery stage of the expansion. Separately, the second quarter ECB Bank Lending Survey (BLS, conducted between 14 and 29 June) released earlier this week also showed that financing conditions are improving and support Eurozone economic momentum. For instance, the BLS reported the strongest demand for housing credit (i.e. mortgages) for over five years and banks have eased credit standards for firms for the first time since the pandemic. Faster Eurozone relative growth points to regional equity outperformance in the second half of 2021.

Second, despite the spread of the infectious Delta variant of Covid, the third wave of new cases appear to have a more limited impact on the PMI data than in previous waves. That’s largely because the authorities are better prepared to deal with the pandemic and have unleashed massive fiscal and monetary stimulus to support economies around the world. Moreover, the vaccine rollout and herd immunity have so far proved to be broadly effective in breaking the link between infections and deaths.

And third, reopening from lockdowns adds another layer of support for the consumer expansion. For instance, by removing remaining social distancing laws in England on 19 July, sectors such as leisure and hospitality will be able to boost operations and revenues. This is now evident in the July UK service PMI, which is still reporting at a buoyant level.

Of course, there is uncertainty over the growth outlook. Managing Covid remains a disruptive force to the global economy and is an ongoing market risk. The rise in the more infectious Delta variant has led some governments to implement consumer restrictions, such as excluding the unvaccinated from bars, restaurants and shopping centres in France from August and spectators at the Tokyo Olympics. Moreover, the UK government’s Test and Trace app has led to increasing numbers of people being ordered to self-isolate (which disrupts economic activity) in a so-called “pingdemic”. Notwithstanding these concerns, provided the global economic expansion can be sustained, there is a solid base for companies to deliver on market earnings’ expectations.

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