EU BANKING FORWARD INDICATOR COLLAPSES

Markit’s European Union PMI sector data, based on the FTSE/Dow Jones Industry Classification Benchmark, signalled a further decline in business activity at EU banks in August. The current sequence of decline now extends to three months, and the pace of contraction accelerated to the fastest since July 2009.

More worryingly, the forward-looking indicator for the EU banking sector – which tracks business expectations over the next 12 months – suffered its largest one-month drop since September 2001. The banking sector’s Business Expectations Index was its lowest since January 2009, approaching the territory last visited during the late-2008 global financial crisis.

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Historically, banking confidence has led the trend in total financial sector activity, which itself leads the trend in wider economic growth. The EU Financials Business Activity Index has a best-fit against the EU Composite Output Index when it is advanced by two months. Therefore the steep fall in the Banking sector Business Expectations Index in August could translate into the EU Financials and all-sector Composite PMI Output Indexes both falling into contraction territory towards the end of the year.

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Banking is one of 22 industry sectors covered by EU PMI data, and is a constituent sector of the broader Financials industry PMI. The latter is based on responses from around 500 banks, real estate, insurance and financial services companies in Germany, the UK, France, Italy, Spain and Ireland. These companies are drawn from the same survey panels that Markit uses to produce national service sector PMIs.

Other areas of the financials industry, namely non-bank financial services and real estate, performed better in August, with activity growth picking up to six- and five-month highs respectively. Real estate posted the third-fastest increase in business activity of all sectors covered, behind healthcare equipment & services and industrial engineering. Financial services was the sixth-best performing sector.

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