By Elwin de Groot, head of macro strategy at Rabobank
Geopolitics has taken precedence over economics. That’s a theme we’ve been pushing in this Global Daily for a great number of years. Yesterday’s events proved no different. So instead of discussing the latest report from the OECD on the global economy, or the latest statement from (any) central bank, we start with the NATO statement, which met for the second time in two weeks to discuss matters under Article 4 of the Washington Treaty. This time it was at the behest of Estonia, whose airspace was violated last Friday by three armed Russian jets.
The statement said that NATO expresses its “full solidarity with all Allies whose airspace has been breached. Russia bears full responsibility for these actions, which are escalatory, risk miscalculation and endanger lives. They must stop.”
The statement went on to warn that “Russia should be in no doubt: NATO and Allies will employ, in accordance with international law, all necessary military and non-military tools to defend ourselves and deter all threats from all directions. We will continue to respond in the manner, timing, and domain of our choosing. Our commitment to Article 5 is ironclad.”
If we compare the choice of language in this statement to the text read by NATO Secretary General Rutte following the Polish drone incident two weeks ago, which was mostly about NATO’s readiness, vigilance and resolve to defend “every inch of Allied territory” – one can see this is a step-up in the strength and specificity of the wording used.
And then, on the heels of that NATO statement came the assertion by Denmark’s PM Mette Frederiksen – following ‘drone incidents’ reported earlier that day at Oslo and Copenhagen airports – that the incident at Copenhagen was a “serious attack” on Danish critical infrastructure, adding that she couldn’t “rule out that it is Russia” who is behind this.
If confirmed, would that be sufficient for a third NATO gathering? And if so, what wording would be used in their third statement? Or could NATO’s next step be a more forceful token rather than putting out another warning text?
US President Trump may not stand in the way, it seems. In his address to the UN, the President lashed out at the institution, claiming that the UN does nothing to stop the world’s problems. But his most remarkable comment perhaps was about Ukraine. The US president stated that Ukraine was in a position to reclaim all territory lost to Russia, with help from the EU. That’s a big shift in stance. He also said that NATO should shoot down Russian aircraft that violate their airspace. On that note, the president also reiterated his earlier call on Europe to stop buying Russian oil, adding that the US will join in secondary sanctions on remaining buyers of Russian energy.
So while can only speculate about the next steps taken by NATO or Europe, opinions appear to be shifting and there can be little doubt that whatever comes next is going to be even more costly for Europe in many respects. So market observers may need to pay some extra attention in this area, rather than pouring over the latest PMI reports.
Speaking of which, those reports were actually sowing more confusion than painting a clear picture of what’s going on. The Eurozone PMIs showed a clear divergence between the manufacturing sector (down) and the services sector (up). And since the services sector has a much greater weight in the economy (and, by extension, also in the composite PMI index of activity), this explains the slight ‘overall’ positive surprise in the Eurozone composite PMI (up 0.2 points to 51.2). However, in terms of the direction of travel, we should perhaps attach a higher weight to the signal given by the manufacturing index?
Since the French data is always released first, that led to a short-lived dip in the currency and markets. However, the aggregate results were better, helped by some improvement in Germany. Domestic demand continues to be a key driver behind the reported economic activity, while new export orders continue to decline. Demand from abroad fell at the fastest pace in six months. These two troughs unsurprisingly correlate with the dates of Trump’s tariff announcements and the EU-US trade deal. A reversal in the manufacturing PMI (as shown in September) could thus be signalling that the US import tariffs and reversal of frontloading activities have now turned into a headwind for the economy. In summary, European growth will probably remain sluggish in the coming quarters, as the limited influx of new orders makes an acceleration unlikely.
We might have seen a bigger FX response to the European PMIs if it weren’t for the US data later in the day, which basically confirmed the picture of a weakening economy. Business activity growth slowed in September, as companies reported softer demand. The bright side for the Fed is, perhaps, that this also limits companies’ abilities to raise selling prices. But on the cost side, businesses reported further price increases as a result of tariffs. So, margins are under pressure. The PMI survey also confirmed the labour market is softening, as companies reported slower hiring. In the services sector, that’s mainly the result of attrition and the unwillingness to fill vacancies. But in manufacturing, the survey responses included job losses due to cost cutting.
The UK composite PMI slipped to 51.0 in September from 53.5, reinforcing the uneasy balance between sticky inflation and weak growth. The pullback reflects softer demand, rising slack in the labour market, and growing uncertainty ahead of the Autumn Budget. Services sector inflation remains elevated, though the survey hints at a modest cooling in underlying cost pressures. Still, we see little in this release to shift the Bank of England’s near-term calculus.
Returning to geopolitics – for balance – could we conclude that the military are coming to the rescue of Europe’s ailing industrial sector? As Politico noted yesterday, Germany’s EUR83bn military procurement plan for the remainder of 2025 and 2026 is tilted heavily towards the purchase of European hardware, with only 8 percent going to American weapons. That is a significant break with the previous years and would imply that the EU may not be able to live up to its promise to buy vast amounts of US weapons (as touted by President Trump).
Whilst this may not get a warm response from the White House, from a ‘statecraft’ perspective, the shift towards domestic and European equipment is understandable, particularly given that Germany’s industry is having a hard time with capacity utilization in the capital goods sector, 3.5%-points below its long-term average. And although it could paint the EU/EC in a corner, we note that the EU-US agreement itself did not mention specific numbers for military procurement. All it said was that “The European Union plans to substantially increase procurement of military and defence equipment from the United States, with the support and facilitation of the US government.”
So anyone with a ‘transactional eye’ would say this leaves sufficient room for manoeuvre and does not necessarily have to result in a new spat between Washington and Brussels.