As recession spreads to even core Euro nations I fear for Greece, Portugal, Spain and Italy

4th May 2012 by Shaun Richards

This week has given us updates on the state of the economy in the Euro area and it has not made pretty reading. We now have the last economic data before voters in both France and Greece go to the polls on Sunday for their Presidential and General Elections respectively. I wonder what sort of Greek government will emerge from this and note that some are already talking of a second election. Let us hope that this is not because the Euro zone thinks they have come to the “wrong” result as we have seen in their various referenda. Whilst I like the songs of Gerry Rafferty I do not want to be hearing this message.

Cause if you get it wrong, you?ll get it right next time (next time)

The Service Sector in the Euro zone

This is the most important component of modern economies and is usually by far the largest sector and I have to confess I waited for this mornings update with not a little trepidation. And it turns out that I was correct to do so.

Final Eurozone Services Business Activity Index: 46.9 (Flash 47.9, March 49.2)

So as the benchmark here is 50 we see that as more data has come in after the initial estimates the outlook has worsened. And there has been a considerable deterioration between March and April of 2.3 which somewhat ominously is the biggest fall since October 2008, a period we do not want to repeat. If we move onto the national breakdown we see that Germany at 52.2 has managed some expansion so the picture elsewhere must be worse than the average.


One country which has shown a severe downturn is Italy where the services PMI has fallen from 44.3 in March to 42.3 in April. So a contraction has got worse and done so at such a rate that the producers of the report added this.

These services figures joined earlier-released retail and manufacturing data in showing faster contractions in activity during April that, with the exception of the latter, are approaching the rates of decline seen at the depth of the 2008/9 recession.

Yes the same 2008/09 recession that we are supposed to have recovered from. Ouch!

And if we look at the detail of the notes we see that the trillion Euros of three-year liquidity provided by the European Central Bank does not seem to have filtered into the required areas as we see this.

a short supply of credit

Apparently you do not get much bang for your buck when you spend a trillion Euros these days…


After looking at Italy’s performance,or rather lack of, it was not a surprise to see this reported about Spain.

 both activity and new business fell at sharp and accelerated rates

We end up with the Spanish service sector falling from 46.3 in March to 42.1 in April so she has gone from a better position than Italy to a worse one. And sadly a fall of 4.2 in one month is a figure which only reminds me of Greece and what happened to her. Unfortunately there was more bad news as in a country which already has a 24.44% unemployment rate then this is grim.

Although the rate of job cuts eased to the weakest since September 2011, it remained marked. All six monitored sectors posted falling staffing levels, led by Transport & Storage and Renting & Business Activities.

What about France ahead of her election?

We even see France slipping into trouble with this set of data. Indeed her service sector appears to have shrunk at the fastest rate of all.

Final Markit France Services Activity Index at 45.2 (50.1 in March), 6-month low.

A contraction in this index of 4.9 is not something that is likely to have gone down well with the breakfast coffee and croissants at the Elysee Palace this morning. And we can add in this weeks manufacturing numbers which I reported on Wednesday.

Final Markit France Composite Output Index at 45.9 (48.7 in March), 6-month low.

So the manufacturing figures which we thought were poor end up improving the overall index and we end the week with the Euro zone having taken several heavy economic punches. In France itself there is at least some hope that the figures have been influenced by her election.

We now know the overall euro zone economic outlook

Let us examine the report.

 At 46.7 in April, down from 49.1 in March, the Markit Eurozone Composite Output Index signalled the fastest rate of decline since last October and one of the steepest contractions since mid-2009. The headline index also came in well below its earlier flash estimate of 47.4.

So back to the dark days and at an accelerating rate. And with some many countries in the Euro area clinging to hopes of export-led growth this does not help either.

with trade between Eurozone nations especially weak

Such news will go down particularly poorly in Greece and Portugal as the export sector was the only one showing signs of growth.

What does this actually mean?

Whilst there is not a perfect relationship between this report and economic growth there is a fairly good one if you examine the data. Accordingly we need to take this seriously.

The survey suggests that the economy was contracting at a quarterly rate of around 0.5% in April

And in a message that may make its way to the ECB towers in Frankfurt (where they will be returning after yesterday’s trip to Barcelona).

suggesting that stimulus measures implemented by the European Central Bank have not had a lasting impact on the real economy.

I think that they may have jumped the gun a little with the last point. This is a unique era with unique responses and we cannot say with any certainty in May that measures applied so recently have failed. There can be considerable lags in monetary policy at the best of times let alone at the worst of times ( with apologies to Charles Dickens). However I do expect the ECB to be mulling this.

LTRO3 The return of the saviour…..

What does all this mean for the crisis?

A sustained economic downturn would hit the Euro area nations on many of the measures used to examine the scale of the crisis.

1. Via what are called automatic stabilisers government spending will rise as unemployment rises. At the same time tax revenue will fall. Accordingly fiscal deficits not only rise but can soar due to then being hit by both trends.

2. Rising fiscal deficits will lead to rising national debts.

3. Falling economic output will mean that rising fiscal deficits and national debts will be compared with lower levels of Gross Domestic Product. So again we get hit by two factors at the same time.

For countries which already have problems in these areas this is a serious issue. And even those who have mostly escaped scrutiny on that point may find themselves dragged in. An example of this could be France and then the problems will have really hit  a core Euro nation.

The original bail out plan for Greece involved economic growth of 1.1% this year as opposed to the minus 5% or so which now seems likely.

Even worse the Euro zone could apply its usual solution

Imagine austerity being applied to a general downward spiral. We would see not only the internal spiral ( falling output requiring more austerity leading to falling output) which has hit Greece and Portugal so severely but possibly an external one too as Euro zone trade flows weaken too.

An irony at a time of elections

Whilst discussing elections talk invariably moves to governments and what they might do. There is food for thought in the performance of Belgium which up until December last year had not had a proper government for 18 months. Yet her economy grew by 2% in 2011 and grew by 0.3% in the first quarter of 2012. I will be watching to see what happens now the politicians have taken full charge again.


There is little spring cheer to be found here. From the perspective of the UK it is quite plain that many of our trading partners are in trouble and that is compared to our stagnation! For Greece my prescription remains the same which is to leave the Euro and return to the Drachma and I hope that whoever wins on Sunday will move in that direction. But as ever my recommendation is to vote and in Greece it is probably as important as it will ever be.

Later today we get the latest monthly numbers for US unemployment and employment. And as an example of the “Confused,you will be theme” after the ISM report telling us that manufacturing employment rose in April we got one from ADP telling us it fell by 5,000! Even that was not the end of it as the weekly initial claims numbers improved back to 365,000….So for those trading good luck at 1:30pm!

20 thoughts on “As recession spreads to even core Euro nations I fear for Greece, Portugal, Spain and Italy”

  1. Anonymous says:

    Sean, do you think the published stats for the EZ include an estimate of the ‘informal’ sectors of each country? These are rather substantial, with (eg) Spain’s government estimating that theirs is a quarter of the total economy. So are they reporting three quarters and ignoring the rest? Which would (in that case) increase their real wealth by one third if reported. I know quite a lot about southern Europe and the endemic nature of the black economies is widespread among those countries. That’s both depressing and encouraging. Depressing because their welfare systems are likely to be underfunded and borrowings high, but encouraging because things are really not as bad as they seem. 

    A second question that flows from this is about our EU contribution. If our black economy is 10% and that of another country (Italy?) is 30%, are the EU taking this into account when setting up the contributions? I don’t know but I have my suspicions…

    1. Anonymous says:

      Hi barncactus

      The answers to your questions are no and no. However I agree that it is an issue particularly at a time when such funds could be vital.

      By definition a black economy is hard to measure accurately but I have written on here and feel that due to her circumstances of having a relatively small fiscal deficit it is Italy that has a potential way out from using it. Senor Monti’s govt is trying to give it a go and I saw a day or two ago the figure of 4 billion Euros flash up as back taxes etc that have been collected.

      But of course on the other hand rasing taxes as some many govts have found themselves doing is only likely to encourage the black economy further….

      1. Anonymous says:

        This is my feeling in Greece. Due to increased taxation (of everybody and anything) and the ineffective state (tax collectors, public sector in general saw significant cuts in everything, their means to work, their salary, their moral, many are expected to be made redundant, and they are trying to survive, to leave not do their job better, they see all around them everything, e.g. health services collapsing) black economy is thriving even more!! The whole programme makes no sense. They are trying to do too many things too late and it is not possible. Regardless of the outcome of the elections I think Greek default and some sort of EZ collapse are inevitable. I don’t think the situation is reversible.

        1. Anonymous says:

          Hi Vassilis

          Good luck for tomorrow. I hope someone will gain power who understands that it is better for Greece to leave the Euro and devalue.

          1. Anonymous says:

            This is only far right and far left Shaun. So, either EZ or Hitler or Stalin. Centerleft and Centeright are for the Euro. It is a hard choice. I ve gotten several calls with people wanting to discuss, what shall I vote? what does it mean etc.? Hitler and Stalin are very popular!

  2. Midge says:

    Musical link from David Guetta
    down down down feel like the club is burning down
    down down down
    down down down

    1. Anonymous says:

      Hi Midge

      Has he been taking lyrical inspiration from Status Quo?

  3. Anonymous says:

    Hey Shaun
    Dont worry, our leading financial boffins at the LSE Financial Markets Group can now estimate the quadratic covariation matrix for an asynchronously observed continuous time signal masked by additive noise…..sorted!

    1. Anonymous says:

      Hi Shire

      Well that woke me up on a Saturday morning! Four complicated assumptions as its base, what could possibly go wrong?

  4. Rods says:

    Hi Shaun,

    Another great piece of analysis.

    What effect do you think the ever tightening noose of EU regulations is having on EU economies?

    I sense there is an ever growing tide of concern and resentment on this with a very good speech made by the president of the Czech Republic, who knows a thing or two about repression from his battles with the old USSR. 

    Some recent EU directives that I’m aware of that affects many peoples lives and livelihoods: 

    1. Operators licence required if you own and drive a vehicle professionally of more that 3.5 tonnes laden weight or 1,525kg unladen weight, so it applies to larger vans, pickups etc. This adds massively to the costs of ownership with some quite onerous requirements. 

    2. Contract workers rights, which has reduced the flexibility of using them, which in turn has reduced the number of jobs. 

    3. The website ‘cookie’ directive, which it is estimated to be costing UK businesses up to £3bn to comply with and because tracking and advertising is much more difficult up to £7bn a year in lost sales. 

    4. New much more comprehensive MOT with automatic failure with any warning lights on along with other more strict conditions.

    The first two reduce workforce and company flexibility, while the first three all add costs to industry which will either reduce profits or will be passed on stoking inflation.

    There is also the issue of ever rising EU budgets and therefore contributions by the EU countries.

    These, along with I’m sure many other directives which I haven’t mentioned must be adding to industry costs, making the EU as a whole less competitive, which in turn will mean shrinking exports, when most EU countries are looking for growth in this area, with some it being the only hope of escaping their austerity led economic death spirals.

    1. Anonymous says:

      Rods, you quote some horrifying example. Allow me to give you one from Croatia: in order to be a chimney-sweep, you must pass a series of state examinations (plus a medical). Then you are granted a “territory” in which to operate; you are forbidden to work outside the area allotted to you and are required to report to “the state” any household whose chimney(s) do not meet the required criteria of safety. However as these regulations were initiated during the Austro-Hungarian Empire, nobody really knows the regulations – or even cares about them, but the reports still land up on the desk of someone, somewhere! Long live the “free market”!

    2. Anonymous says:

      Hi Rods, You are correct about the EU regulations. You have covered just the tip of the iceberg. As per Barnacactus’s post on Southern Europe, regulations are willfully ignored so they just do not worry about them.

      Also the EC operate without accountability and have no interest in tackling Southern European noncompliance. Worse still, my MEP in the UK (where I’m registered to vote), Nirj Deva does not bother to answer emails at all. Why do we pay his salary ?  Which had led me to believe the EC is an ineffective and costly waste of time. Along with Shuan’s campaign for more democracy at the BOE I also want to have an EC membership referendum.

    3. Anonymous says:

      Hi Rods

      I agree that it is a problem and it does not only come from the EU. We have had governments now of every combination of hue in the UK and none of them have done anything about red tape as it is called apart from increase it.

      I think it goes back to the problem of having politicians who have no experience of anything other than politics which leavs them very out of touch in such areas.

      1. Rods says:

        Hi Shaun,

        I agree, we used to have successful professional and business people who wanted to give something back to society through public service, so they became MPs. The wealth of practical real life experience they had built up was then applied to running the country, with the attitude: “What can I do for my country?”

        Unfortunately, parliamentary reform has now made this impossible, so you have to be a full time MP. Good successful people can earn much more than an MP’s salary, so we tend to end up with the dregs (with some exceptions), who have never had a proper job before becoming MPs. 

        These days most of the MP’s can’t even talk a good game, let alone play one! This ‘professional’ political class are their for their own advancement, maximum earnings and expenses, with the attitude: “What can my country do for me?”

  5. JW says:

    Hi Shaun
    I agree with the comments by barncactus about the ‘black economy’ in southern europe. I think its highly likely that perversly the introduction of ridiculously low cash transaction limits in Spain and Italy will only encourage the ‘beating of the system’ which is a way of life. So less tax and less recorded economic activity, the exact opposite of intentions.
    US unemployment numbers are going completely idiotic. After unseasonably warm Feb/March , April still had a positive weather correction, never happened before. The number of citizens now off the available workforce numbers has gone off the graph. Hourly wage rates down again in real terms. Part time jobs through the roof. But hey, who’s counting, magically the Unemployment rate went down to 8.1%. Eventually some sort of reality has to come back into the numbers ( may?), and then the number will start rising to its real rate , over 11%.
    Oil Price is going down quickly this week, I wonder……! 

    1. Anonymous says:

      Hi JW

      Yes I was watching the oil price too which at one point dropped back to US $112 before rallying a little to US $113 in Brent Crude terms.With £ at US $1.615 it is about time we saw some lower fuel prices in the UK.

      My favourite measure of underemployment U-6 stayed the same at 14.5% in seasonally adjusted terms and I think gave a clearer signal of stagnation when it is supposed to be improving.

      As to the particpation rate we saw another fall to 63.6% which reminded me that in New Zealand this week it rose to 68.8% leading to a rise in the recorded unemployment rate. So we have a(nother) potential problem for the recovery…..

      1. JW says:

         Hi Shaun
        NZ tends to have a younger population age profile than the US, but the only way that these comparative stats can make sense is if there are a lot of the 45-55 age group in the US no longer participating. As this is usually the group with the maximum spending power, it is as you say a clear problem for sustainable recovery.

        1. Anonymous says:

          Do you have a quotable source for the age profiles of NZ & the USA ?

          I’d have guessed that the younger kiwis emigrate to Australia, Britain, USA etc where the USA has large numbers of immigrants. Illegal immigrants in the USA may not be included in the US statistics.

          1. JW says:

             I just googled the respective stats. The US has a ‘bulge’ in the 45-55 yr age group, whereas NZ has a more typical ‘pyramid’ with the ‘under 45’ being larger proportionally.

  6. Greek elections could be unsettling: it looks like the pro-bailout parties, New Democracy and PASOK, have between them only 149 of the 151 votes needed to control their Legislature. This could mean they’ll need one of the radical left or radical right parties to form a government, both of whom are against the bailout. 

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