Drop in Eurozone PMIs, agreement between China and the US to reduce the US deficit in the trade of goods

Macro Highlights - 5/29/2018

In short
  • In the Eurozone, PMIs continued to drop in May, supporting our scenario of a deceleration in GDP growth in 2018
  • The US and China issued a joint statement agreeing to substantially reduce the US trade deficit in goods with China, easing the trade tensions between the two countries
  • The lack of quantified targets and the most recent announcement by Donald Trump regarding possible trade tariffs on US auto imports nevertheless suggest the persistence of a high level of uncertainty

In the Eurozone, PMIs continued to drop in May, supporting our scenario of a deceleration in GDP growth in 2018

The confidence of eurozone purchasing managers continues its gradual erosion. The composite PMI, which combines the trend in both the manufacturing and services sectors, and which hit a 12-year peak in January 2018, has thus declined on a continual basis since. This trend was confirmed by the preliminary PMI data for May.

The trend in this index and the survey components back our scenario according to which Eurozone GDP growth, after benefiting in 2017 from catch-up momentum and the past decline in the euro, should slow in 2018. This weaker economic trend could, according to our analysis, support the cautious stance of the European Central Bank (ECB). Thus, while we continue to expect that the ECB will reduce its asset purchases in September 2018, bringing them to a gradual halt by the end of the year, we forecast that it should maintain its key rates at their current level in 2018 and 2019, and that it should continue, over this same period, to reinvest the payments from maturing securities, thereby maintaining its balance at a stable and high level.

The composite PMI for the Eurozone dropped from 55.1 to 54.1 in May, which would be in line with GDP growth of 0.4% in Q2 2018. The slowdown in activity was observed in both the services sector, for which the PMI was down from 54.7 to 53.9, and the manufacturing sector, down from 56.2 to 55.5. The components of the survey notably showed:

  • A further drop in new export orders in the manufacturing sector, with the index down from 54.3 to 52.4 in May, returning to its lowest level since August 2016. This weakness in export orders could be due to the rise in the euro since April 2017.
  • An increase in input prices, up from 58.6 to 59.8 for the composite index. This may be due to the rise in energy prices and could weigh on the margins of companies if, as we expect, the latter are no longer able to pass this increase on to consumer prices due to a deceleration in private consumption.


  • Overall, these publications support our scenario of a deceleration in activity in the eurozone, marked by the negative effects of the appreciation of the euro on exports and the negative effects of energy prices on the real purchasing power of households in a context of moderate wage growth.
  • This slowdown in activity should, according to our analysis, support the ECB in its cautious approach and lead it to adopt a more accommodative communication than anticipated. In this context, we maintain our scenario according to which, if the ECB were to end its asset purchases at end-2018, it would (i) maintain its accommodative monetary conditions, by keeping its key rates at their current levels in 2018 and 2019, and (ii) continue its reinvestment policy, enabling it to maintain the size of its balance sheet at a stable and high level.

The United States and China have come to  a trade agreement, uncertainty surrounding international trade persists

On 19 May, China and the US issued a joint statement according to which effective measures would be taken to substantially reduce the US trade deficit in goods with China. This deficit totalled USD 376 billion in 2017.

In general, the two economies have agreed not to engage in a trade war and to put an end to the introduction of new trade tariffs, as affirmed by China’s Vice Premier Liu He. Although specific figures have not been communicated, China has committed to significant increases in its US imports, notably in the agriculture and energy segments. China has also committed to reinforcing its regulations in terms of protection of intellectual property, which had been criticized by Donald Trump as encouraging forced technological transfers to the detriment of US companies operating in China. Moreover, following on from the announcements made at the World Economic Forum in Davos, Beijing reiterated its intention to further open up its domestic market internationally, in the services and automobile sectors among others. Regarding this point, the Chinese Finance Ministry made the cut in trade tariffs applied to Chinese vehicles and parts imports effective from 1 July 2018. These tariffs will thus drop from 25% to 15% and from 10% to 6%, respectively. This factor is set to buoy international vehicle exports to China. US car exports totalled USD157 billion in 2017, 9% of which – i.e. USD14 billion – were to China. For Germany, vehicle exports to China totalled 258,443 units in 2017, i.e. 5.9% of total vehicle exports, representing close to EUR10 billion. While these developments are set to ease trade tension between the two countries, no precise numbers were communicated in relation to the targets.

However, given the factors currently in place, it appears unlikely that even a significant increase in Chinese purchases of agricultural and energy goods could reduce the United States’ current trade deficit with China by USD200 billion, as the US President demanded at the start of negotiations. In 2016, Chinese agricultural and energy imports represented around USD17 billion and USD5 billion, respectively.

Thus, as analysed by Mathilde Lemoine, Edmond de Rothschild Group Chief Economist, trade tensions could persist, maintaining a high degree of uncertainty on the international trade front, albeit without leading to a significant slowdown in trade.

The persistence of a high level of uncertainty is reflected in the events that followed the agreement with China. Donald Trump has requested that the US Commerce Department investigate automobile imports to determine if they represent a threat to the country’s national security. The issue of national security had already been brought up as justification for the implementation of the trade tariffs on steel and aluminium, a method that enables the US President to avoid having to consult with Congress. While the administration is planning tariffs of 25% on vehicle imports, the President will not make a final decision until receiving the results of the investigation from the Commerce Secretary. US imports of new vehicles totalled USD191.7 billion in 2017, i .e. 8.2% of total US goods imports. The majority came from Mexico, Canada, Japan and Germany.