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Wednesday, July 24, 2013

Turning a corner in the eurozone? Not quite yet...

There has been a lot of chatter this morning about the eurozone recession coming to an end following the release of the latest Markit Purchasing Managers’ Index (PMI) - a set of indicators used to measure the economic health of the manufacturing and service sectors. The index reached the highest level for 18 months and pushed past the point where it was continuing to decrease (see the relevant graphs below).


These results are clearly positive, but it seems that some commentators have been getting a bit ahead of themselves in declaring the recession and troubles over. Here are a few points to keep in mind:
  • The average for the eurozone has only just pushed into the positive territory and remains closer to being flat. This suggests that GDP may have stopped contracting but has flattened out rather than returning sharply to growth.
  • Furthermore, this is an aggregate figure. In fact, the PMIs for many countries are still contracting – France included (see right-hand graph above). Given that this crisis is much more about divisions between countries than the aggregate as a whole, such gaps remain important. In fact, with Germany posting strong results, the gap between the strongest and weakest may grow. This could create tensions for future ECB policy.
  • As the graph above shows (courtesy of Commerzbank) although some of the peripheral countries are doing better, concerns are now growing about some of the semi-core and even core members, such as France. The economic sentiment and outlook in these countries remains worryingly bleak. For France in particular, questions need to be asked about how useful the PMIs are as an indicator give that they have been contracting for some time but GDP has remained fairly flat – i.e. they have detached from one another. It’s not clear any turnaround in PMI will show up in GDP.
  • PMIs represent the private sector. Other components of GDP, in particular public spending and investment generally continue to fall. Even if the private sector is growing, it may not yet be enough to offset this. In many countries the private sector growth is also tied in close with export growth and an external recovery – this remains fragile (see for example the corresponding PMIs for China which fell sharply).
  • Other indicators also suggest that the difficult environment will continue for some time. The ECB’s bank lending survey also out today highlighted that credit to the real economy continues to contract, albeit at a slower rate. Consumer confidence released yesterday did show a large jump but remains well below its historical average in depression territory.
  • A slight turnaround was widely predicted for the second half of this year and so may be largely priced in when it comes to borrowing costs and stock markets (not least because the latter seems to continue to outstrip the macroeconomic fundamentals). 
  • Finally, it's worth remembering that political uncertainty in southern eurozone countries can return at any point in time these days (see our previous blog posts for the latest from Portugal, Italy and Spain).
All that said, it is easy to pick holes in any single piece of data. The positive turnaround is good for the eurozone, but it is only one indicator and time will tell whether it can amount to a sustained improvement. Given the many obstacles which the eurozone has failed to address this still seems a very uncertain prospect to say the least.

2 comments:

Rik said...

Looks more and more that PMIs in longer dips donot give a good prognosis. China PMIs are also complete crap (and likely rigged and now no longer published).

Unemployment is pointing into the other direction. It is extremely high and still rising. Hard to see how that agrees with say Q3 growth.

PMIs in the South were very high compared to the situation they were in.

In other words first see it till I believe it.
The answer where the growth should be coming from is also not given. Consumers certainly not. And if consumers donot move business is very unlikely to move as well. Worldeconomy is going in the wrong direction as well.

We might be in for an original deferred replacement few months. That could be possible.
But even if this would be so it is hard to see were structural growth should come from.

Furthermore Spanish and a few others still report GDP much higher than one would expect seen eg unemployment. That will have to be 'solved' at some time as well. Problem with long crisis all the skeleton come to the surface.

DVK said...

The fundamental conclusion from this story is that the economic gap between North and South is widening.With investment contracting in the South and not only there and the credit gap widening the only certain comment is that the bonds that keep the EU together are feeling the strain.The German mastery of Europe has not been archived yet so we cannot write about European economic recovery but only Northen one.
DVK