24th May 2012
Late last night or more accurately early this morning European Council President Van Rompuy gave a Press Conference to announce the progress at the latest European Union summit. After Mr. Van Rompuy had given us some Euro waffle which seemed to involve mentioning the word growth as often as he could we got European Commission President Barosso who did the same. However in answer to a question President Barosso said this: "The idea was not to have formal decisions today…."
And Mr. Van Rompuy backed it up with: "…no formal plans will come (at the summit) in June either."
So those who had hoped for progress on issues such as, Eurobonds, a Euro area bank deposit guarantee scheme, or a Euro area bank bailout for Spain received no support at all! You might think that at least they would agree something on Greece but the official statement merely repeated the existing official line:
It reaffirms that we want Greece to remain in the euro area while respecting its commitments
Somehow the spelling error (reaffirms and not reaffirm) seems to reinforce the general atmosphere of incompetence combined with individuals who are plainly out of their depth. As the spoof Angela Merkel twitter account put it:
Well that was a waste of an evening. #gutenacht
I have discussed before the reducing half-life of any goodwill from these summits and this time it seems to have gone to zero as the Euro started to fall again against the US Dollar virtually immediately. The US equity market which in terms of the S&P 500 index had earlier in the day staged quite a rally from 20 points down to 2 points up was left looking rather unsupported. As an example the Eurofirst 300 equity index is flat on the day at 972 as I type this.
Economic Growth in the Euro area
In a coincidence of timing only a few hours after the press conference we received the latest most up to date information on growth in the Euro area from the flash Purchasing Manager’s Reports for Germany and France.
Even Germany has an economy which appears to be shrinking
Let us take a look at the detail of the report:
Flash Germany Composite Output Index at 49.6 (50.5 in April), 6-month low.
As 50 is the benchmark for the index we can see that even Germany is no longer growing and is in fact contracting slightly. Added to this is uncomfortable news about the German manufacturing locomotive"
Flash Germany Manufacturing PMI at 45.0 (46.2 in April), 35-month low.
So we see that there has been a substantial reduction in Germany’s supposedly all-conquering manufacturing sector so far in May. And if we examine the 35 month low and look back to how things were then we get reminded that back in 2009 the German economy shrank by 5.1% according to Eurostat. Indeed we get a further reminder of historical parallels in this bit of analysis:
"the current period of falling new orders now almost matches the length, though not the depth, of the contraction in 2008/09."
If we move over to the official German data from Destatis we see that German economic growth was 0.5% in the first quarter. Now let us examine why:
"In a quarter-on-quarter comparison, positive contributions were made mainly by exports"
I think if we link everything together we can see how an economy depending on export growth may have ground to a halt in the second quarter of 2012.
German IFO Business Climate Index
This fell to 106.9 in May from April’s 109.9 and if we look at the report we see this:
"The Ifo Business Climate Index for industry and trade in Germany fell significantly in May. Assessments of the current business situation deteriorated clearly."
So whilst the reading is above the long-term average of 100 this index too is showing a weakening. And as historical perspectives are on my mind it is back to the levels of midsummer 2008.
Okay what about the wider Euro area?
The headline turned out to be as grim as I feared.
Eurozone suffers worst downturn since mid-2009
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