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Euro Area Economy Suddenly Looks Stronger

Posted by Joseph Trevisani on Feb 21, 2017 1:59:41 PM

Has European political uncertainty taken a back seat to economic optimism?

Businesses in the euro zone are more sanguine about the future than they have been in six years despite Dutch and French elections that promise to upend the contnent's policial consensus no matter what their actual outcome.   

The euro zone composite purchasing managers’ index  (PMI) from Markit Economics came in at 56.0 for February well above the 54.2 median consensus and a surprise increase from January's 54.4.  

The preliminary reading places economic growth for the first quarter at about 0.6 percent according to the London based econometrics firm on Tuesday. Optimism among purchasing managers, prehaps fueled by rising order books suggest a stronger first half economy than previously thought.

The leading candidates in both Holland and France, Geert Wilders and Marine Le Pen have blamed the EMU for many of their economic woes and said they would lead their nations out of the united currency.  While both are leading in the polling, neither are currently expected to take power after their respective elections.

In Holland that is because the other leading parties have said they would not form a government with Mr. Wilders even if he does win a plurality of the vote.  In France it is because Ms Le Pen's National Front is expected lose the required second round vote in May between the two leading candidates  from the preliminary vote.  

But in eleven months that have seen the passage of the Brexit referendum in the United Kingdom and the election of Donald Trump in the United States, it is clear that political assumptions are unreliable at best and seriously misleading at worst.

If either candidate were to win office it is difficult to see how European business leaders would maintain their optimistic outlook. 

The manufacturing and service sectors of the monetary union appear better positioned heading into the New Year as well.. The PMI index  for factory work rose to 55.5 in February from 55.2 the prior month. Analysts had forecast a slight drop to 55.0.  The index for the larger service sector climbed to 55.6 from 53.7 in January, where it had been predicted to remain. 

German and  French composite PMI's were also better than expected in February.

Purchasing managers indexes are keyed to 50, above indicates expansion and below contraction.

Joseph Trevisani

Chief Market Strategist

WorldWideMarkets

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