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!