Flash Comment Euro area: Higher PMIs confirm our view of a stronger recovery

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Investment Research General Market Conditions 20 February 2015 Flash Comment Euro area: Higher PMIs confirm our view of a stronger recovery The euro area composite PMI increased to 53.5 in February from 52.6 in January and is now at the highest level since summer last year. The increase was driven by the services PMI, which rose to 53.9 from 52.7 whereas the manufacturing PMI was almost unchanged at 51.1. For the manufacturing PMI the details were better than the headline figure. First, new orders increased a bit, driven by higher export orders. Added to this, there was a decline in stocks of finished goods implying the order-inventory balance increased. This now points to an increase in manufacturing PMI going forward. The stronger services PMI was driven by higher future business expectations, incoming new business, and there was also an increase in backlog of work. The services PMI employment index increased to the highest level since May 2011. The increase in services PMI is likely to reflect the boost to private consumption from the decline in the oil price and it suggests private consumption will increase further in Q1. Based on solid retail sales in Q4, we think it was the main driver behind higher GDP growth in Q4. The improvement in the PMIs and the signal that manufacturing PMI could increase further is in line with our view that euro GDP growth will be strong in Q1. For 2015 we expect GDP growth of 1.5% which is above consensus at 1.2%. Our view reflects the fact that euro GDP growth is supported by a number of factors: 1) geopolitical uncertainty has faded 2) private consumption is being boosted by the decline in the oil price 3) credit is cheaper and more accessible 4) exports are supported by the weaker euro 5) growth in exports markets is decent and 6) the fiscal headwind has faded. Germany: Composite PMI also increased to the highest level since summer, confirming the latest signals that the German business cycle has turned. Services PMI for Germany continued to increase in February, rising to 55.5 from 54.0 in January. The increase followed the January flash estimate being revised up in the final release, in a sign of progress during the month. The higher services PMI was driven by incoming new business, and also an increase in the backlog of work. The employment index also rose in February, to 54.6, and is now at the highest level since the beginning of 2012. For the German services PMI, input prices have trended lower in the last four months, but output prices have been more stable and rose above 50 in February. Manufacturing PMI was unchanged at 50.9. There was an increase in new exports orders, but overall new orders were unchanged in February. Stocks of finished goods were a bit higher, but the order-inventory balance still points to a small increase in manufacturing PMI. Senior Analyst Pernille Bomholdt Nielsen +45 45 13 20 21 perni@danskebank.dk Important disclosures and certifications are contained from page 5 of this report. www.danskeresearch.com

In France, services PMI was very strong, increasing to 53.4 in February from 49.4 in January, and is thus at its highest level since 2011. The increase was driven by higher incoming new business and future business expectations, while the employment index also increased above 50 for the first time since 2013. Some of the increase was also due to higher backlog of work. As mentioned above, this likely reflects a boost to private consumption in Q1. In Q2 it only increased 0.2% q/q, hence it seems that the impact from the oil price decline will come with a lag in France. French manufacturing PMI declined to 47.7 in January from 49.2. The decline reflected lower new orders, which was driven by weaker domestic orders, as new export orders only declined a bit. On a positive note, some of the decline in the manufacturing PMI was due to lower stocks of finished goods, which implied the order-inventory balance increased considerably, suggesting manufacturing PMI will increase. Euro area: PMIs vs GDP growth Euro area: new orders Euro area: PMI manufacturing Euro area: PMI manufacturing, input/output prices 2 20 February 2015 www.danskeresearch.com

Euro area: PMI services, business activity/expectations Euro area: PMI services, input/output prices Germany: PMIs vs GDP growth Germany, PMI manufacturing Germany: PMI services, business activity/expectations Germany: PMI services, input/output prices 3 20 February 2015 www.danskeresearch.com

France: PMIs vs GDP growth France: PMI manufacturing France: PMI services, business activity/expectations France: PMI services, input/output prices 4 20 February 2015 www.danskeresearch.com

Disclosures This research report has been prepared by Danske Bank Markets, a division of Danske Bank A/S ( Danske Bank ). The author of the research report is Pernille Bomholdt Nielsen, Senior Analyst. Analyst certification Each research analyst responsible for the content of this research report certifies that the views expressed in this research report accurately reflect the research analyst s personal view about the financial instruments and issuers covered by the research report. Each responsible research analyst further certifies that no part of the compensation of the research analyst was, is or will be, directly or indirectly, related to the specific recommendations expressed in the research report. Regulation Danske Bank is authorised and subject to regulation by the Danish Financial Supervisory Authority and is subject to the rules and regulation of the relevant regulators in all other jurisdictions where it conducts business. Danske Bank is subject to limited regulation by the Financial Conduct Authority and the Prudential Regulation Authority (UK). Details on the extent of the regulation by the Financial Conduct Authority and the Prudential Regulation Authority are available from Danske Bank on request. The research reports of Danske Bank are prepared in accordance with the Danish Society of Financial Analysts rules of ethics and the recommendations of the Danish Securities Dealers Association. Conflicts of interest Danske Bank has established procedures to prevent conflicts of interest and to ensure the provision of highquality research based on research objectivity and independence. These procedures are documented in Danske Bank s research policies. Employees within Danske Bank s Research Departments have been instructed that any request that might impair the objectivity and independence of research shall be referred to Research Management and the Compliance Department. Danske Bank s Research Departments are organised independently from and do not report to other business areas within Danske Bank. Research analysts are remunerated in part based on the overall profitability of Danske Bank, which includes investment banking revenues, but do not receive bonuses or other remuneration linked to specific corporate finance or debt capital transactions. Financial models and/or methodology used in this research report Calculations and presentations in this research report are based on standard econometric tools and methodology as well as publicly available statistics for each individual security, issuer and/or country. Documentation can be obtained from the authors on request. Risk warning Major risks connected with recommendations or opinions in this research report, including a sensitivity analysis of relevant assumptions, are stated throughout the text. Date of first publication See the front page of this research report for the date of first publication. General disclaimer This research has been prepared by Danske Bank Markets (a division of Danske Bank A/S). It is provided for informational purposes only. It does not constitute or form part of, and shall under no circumstances be considered as, an offer to sell or a solicitation of an offer to purchase or sell any relevant financial instruments (i.e. financial instruments mentioned herein or other financial instruments of any issuer mentioned herein and/or options, warrants, rights or other interests with respect to any such financial instruments) ( Relevant Financial Instruments ). The research report has been prepared independently and solely on the basis of publicly available information that Danske Bank considers to be reliable. While reasonable care has been taken to ensure that its contents are not untrue or misleading, no representation is made as to its accuracy or completeness and Danske Bank, its affiliates and subsidiaries accept no liability whatsoever for any direct or consequential loss, including without limitation any loss of profits, arising from reliance on this research report. The opinions expressed herein are the opinions of the research analysts responsible for the research report and reflect their judgement as of the date hereof. These opinions are subject to change, and Danske Bank does not undertake to notify any recipient of this research report of any such change nor of any other changes related to the information provided in this research report. 5 20 February 2015 www.danskeresearch.com

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