Back in December last year I mentioned that the likely outcome of the implementation of the “fiscal compact” was a counterproductive outcome for Europe which risked damage to economies further afield:
So while there is no credible counter-balance for the effects of supra-European austerity any attempt to implement the new “fiscal compact” will make Europe’s economic issues worse. The continent is already on the way to recession and unless we see some additional action from the ECB, or a huge swing against this new framework, the push to implement the outcomes of the summit will simply accelerate that outcome. My assumption is that, if Europe does ratify this framework (there are a few stragglers), after 12-24 months of trying the effect will be so disastrous that they will eventually give up. But until then my base case for Europe is a significantly worse economic outcome.
I could be somewhat more positive if I thought the rest of the world was going to be able to provide the sort of demand for European products and services of a magnitude that could offset internal European deleveraging. However, in the current global environment it isn’t going to occur and the inter-dependencies between Europe and the rest of the world guarantee that a slowing Europe means a slowing globe.
Since I wrote that post the European economy has continued to slow with the Production Managers Index (PMI) data showing a month-by-month deterioration in outlook. One of the major themes we have seen in the PMI data is the fact that the deteriorating periphery was slowing dragging down Europe’s core and eventually, given intra-European trade, this was inevitably going to reach of point where German growth halted and the economy began to shrink:
Overnight German unemployment data was released at it continued to show similar trends:
German unemployment increased for a fifth straight month in August as the European debt crisis curbed demand for exports and companies held back investment.
The number of people without a job increased a seasonally adjusted 9,000 to 2.90 million, the Federal Labor Agency in Nuremberg said today. Economists forecast a gain of 7,000, the median of 31 estimates in a Bloomberg News survey shows. The adjusted jobless rate was unchanged at 6.8 percent.
Companies are delaying hiring and investment as the debt crisis curbs European demand for their goods and damps the outlook for economic growth and corporate earnings. The jobless rate is still at a two-decade low and wages are rising, boosting consumer spending in Europe’s largest economy and helping it to weather the turmoil. Until April, unemployment had sustained an almost uninterrupted decline for more than two and a half years.
That report was joined by the IFO business climate survey which also suggested again that confidence in the economy is in decline:
A leading German business questionnaire has revealed that confidence in the economy is the worst it has been in two and a half years.
The IFO Business Climate Survey, conducted by the CESifo Group based in Munich, found that the economic mood had darkened for August in their monthly survey, from the responses of 7,000 companies in the manufacturing, construction, wholesaling and retailing sectors.
The worst affected sectors were in retailing and wholesaling, who received indexed negative scores of 4.7 and 2.1 respectively, both had positive scores in the two previous studies taken in June and July.
For the construction industry a negative score was reached for the fifth consecutive month, but August’s figure of minus 6.9 was only a slight drop from July by 0.2, suggesting that there is still some room for optimism.
Although there was better news from the survey for manufacturing as there was a decline in negative attitudes, as the figures improved by 0.8 from the preceding study in July.
In the first half of 2012 German exports to Portugal were down 14.3%, 9.4% to Spain and 9.2% to Greece showing the flow-on effects of the weakening periphery on the export driven economy. This intra-European downturn was offset by increases to non-Europe trade, however the latest reports from German business suggest that this halted rapidly since. From the German PMI:
August data pointed to a steep and accelerated reduction in new business received by private sector companies across Germany. The overall pace of decline was the most marked since June 2009, reflecting sharp decreases in both the manufacturing and service sectors.
Anecdotal evidence attributed the fall in new work to unfavourable underlying economic conditions and, in some cases, a continued weakening in demand from Southern Europe. In the manufacturing sector, new export orders dropped rapidly in August, and the rate of contraction reached its fastest since April 2009. Lower workloads in turn resulted in another substantial fall in purchasing activity at manufacturing firms, alongside reductions in inventory levels.
Angela Merkel is currently in Beijing in discussion over China-German trade and it is quite clear from statements made by Chinese officials that they too are concerned about the European crisis. Obviously this is an outcome of falling exports:
The European Union is China’s biggest export market after the U.S., and shipments are plunging, exacerbating the slowdown in China’s own economic growth. China’s exports to the EU fell 16.2 percent in July from a year earlier, with sales to Italy falling 35.8 percent, according to Chinese customs figures.
With similar data from Japan it seems that my earlier assessment of the likely outcome are holding up and the tertiary flow-on effects to Australia are now becoming obvious.
As I have stated a number times in the past, my opinion is that we were never going to see any definite resolution from Europe until the German and/or Italian economies became embroiled in the crisis. As the chart below displays Italy is starting to show signs of accelerating troubles and the data is starting to show that Germany is reaching an inflection point:
The question now is with a weakening economy is there the political capital and will left in the EZ to enact further integration as spoken about yet again by Jose Barosso overnight, and , more immediately, what exactly will the ECB be able to serve up as an incentive to make it happen?