Last night saw the release of the February Flash PMIs in Europe and, like the Chinese result yesterday, the pulse towards growth that was apparent in January is fading in February. The headline results were weak:
Flash Eurozone PMI Composite Output Index at 49.7 (50.4 in January). Second-highest in six months.
Flash Eurozone Services PMI Activity Index(2) at 49.4 (50.4 in January). Second-highest in six months.
Flash Eurozone Manufacturing PMI (3) at 49.0 (48.8 in January). Six-month high.
Flash Eurozone Manufacturing PMI Output Index(4) at 50.4 (50.4 in January).
In output terms it was no surprise to see the same pattern that dominated last year with Germany OK but slowing once more and everyone else falling behind:
New orders were slightly better but not at a pace that was reassuring:
Incoming new business fell for the seventh month running, but the rate of deterioration eased for the fourth month in a row to register the smallest drop in demand for six months. Rates of decline eased in both manufacturing and services, with the latter showing the smaller decline. Manufacturers reported the weakest drop in demand for seven months, led by an easing in the rate of loss in new export orders, while the decline in service sector new business was the smallest in the current six-month sequence.
Backlogs of orders fell across the region for the eighth successive month, but at reduced rates in both manufacturing and services. The overall fall was the smallest for six months. However, a combination of falling inflows of new business and lower backlogs of work caused companies to trim their headcounts, leading to a slight drop in employment for the second successive month.
Reductions in headcounts were only marginal in both manufacturing and services, but contrasted with robust employment growth in both sectors during the first half of last year. Employment growth in Germany slowed to the weakest since March 2010, while only a modest gain was seen in France. Elsewhere in the Eurozone, the average rate of job losses eased to a four-month low but remained steep.
Improvement in the second derivatives can be a helpful signal in picking turns on the cycle but the pace of the turnaround looks like an oil tanker not race car. Weakening employment markets in the core will do nothing to help speed up a turnaround.
Looking more closely at the core, the French PMI fell:
Flash France Composite Output Index(1) slips to 50.6 (51.2 in January), 2-month low
Flash France Services Activity Index(2) falls to 50.3 (52.3 in January), 2-month low
Flash France Manufacturing PMI(3) rises to 50.2 (48.5 in January), 7-month high
Flash France Manufacturing Output Index(4) at 51.4 (48.8 in January), 8-month high business was down slightly at both service providers and manufacturers.
As did the German:
Flash Germany Composite Output Index at 52.9 (53.9 in January), 2-month low.
Flash Germany Services Activity Index(2) at 52.6 (53.7 in January), 2-month low.
Flash Germany Manufacturing PMI(3) at 50.1 (51.0 in January), 2-month low.
Flash Germany Manufacturing Output Index(4) at 53.5 (54.3 in December), 2-month low.
Worse, the new orders for German manufacturers fell more quickly:
…growth was confined to the service economy, where the modest rise in new work was the fastest since July 2011. By contrast, manufacturers saw a drop in new orders for the eighth consecutive month, which they mainly linked to a general reluctance among clients to commit to new spending. There was a particularly marked fall in new export work received by manufacturers, largely reflecting weak demand from within Europe.
I see nothing in these reports that makes me change my view that Europe has set course for perpetual recession. Coming on top of yesterday’s weak China PMI, I also see no reason to alter my view that the global economy is very much looking at paltry growth in the year ahead.
Internally at MB we have been discussing that the current divergence between ebullient equity markets and weak macro settings could have some way to run but, in the end, the new year exuberance will erode and ultimately founder on poor economic data. That process has begun.
“I see nothing in these reports that makes me change my view that Europe has set course for perpetual recession. Coming on top of yesterday’s weak China PMI, I also see no reason to alter my view that the global economy is very much looking at paltry growth in the year ahead.”
yet growth predictions here remain rosy. Why not run a book on when the RBA will have a reality check?
I’m sticking with likelihood of recession by this time next year.
“I’m sticking with likelihood of recession by this time next year.”
Ah…Beware the will and ways of the Keynesian pump, however?
The only things I would bet on, personally, would be:
- tightening business profit margins
- increased govt spending (yes, the surplus will likely be “going to deficit, for the good of the nation…”, etc)
- decreasing RBA IRs
ie. two-quarters of negative GDP growth to qualify as “recession” are by no means inevitable, IMHO.
That (GDP) magical, myseterious and increasinly irrelevant metric is a very precious political metric indeed! I would expect the govt to be keeping it in check, wherever reasonably possible.
My 2c
yeah the technical requirement for 2 quarters probably make it a tad questionable. I guess I was thinking along the lines of the onset of it, i.e. the first negative quarter.
the feedback cycle of a continued slow downtrend in house prices and tightening in spending makes this a lock if the guvmint sticks to getting a surplus by hook or by crook (IMO). If they abandon surplus aspirations then I would be abandoning my forecast all other things being equal.
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