The PMIs warn Europe is getting worse

Advertisement

More Purchasing Manufacturers Index (PMI ) data overnight. Comments from Chris Williamson, Chief Economist at Markit economics, sum it up nicely:

The eurozone economy continued to deteriorate at an alarming pace in November, and is entrenched in the steepest downturn since mid-2009. Officially, the region saw only a very modest slide back into recession in the third quarter, with GDP falling by a mere 0.1%, but the PMI suggests that the downturn is set to gather pace significantly in the fourth quarter. The final three months of the year could see GDP fall by as much as 0.5%.

While it is reassuring to have seen signs of stabilisation in some survey indicators, the overall rate of decline remains severe and has spread to encompass Germany, suggesting the situation could deteriorate further in the coming months. With jobs being cut at the second-fastest rate since January 2010 and expectations for the year ahead in the services sector slumping to the lowest since March 2009, firms have clearly become increasingly anxious about the economic outlook and are seeking to control costs as much as possible. All this suggests that any swift return to growth is unlikely.

There isn’t much new here, this is the same dynamic I have been commenting on for well over a year now. In recent weeks it has become all too obvious that economic weakness has now got a firm grip ‘the core’ of the EZ with the downgrade of France and the acceleration of a downturn in the Netherlands. Germany too is slowly weakening as the PMI report shows.

So no surprises here, and we continue to travel along the path of expected outcomes.

Advertisement

Attempts at internal devaluation across southern Europe are crushing aggregate demand in those countries, this is flowing back into the ‘core’ via the tradeable sectors, lowering manufacturing production and output, which is in-turn pulling down the service sectors of those countries. External surpluses require a counter-party external deficit and, as I’ve explained many times before, when you’re all each others trade partners and are all trying the same trick it simply becomes a race to the bottom.

The fact is that the ‘fiscal compact’ is forcing further retrenchment on an already indebted private sector in much of the periphery and the inevitable outcome is lower aggregate demand. Without demand, in the absence of debt relief, there’s no trade. Without trade there is no income and so unemployment rises, industrial production lowers, bad debts and defaults begin to accumulate and inevitably government finances sink. Over the last 6 months we’ve seen a swathe of countries attempt to counter-act this outcome with even more ambitious fiscal tightening, but as you are surely aware by now this is akin to strangling someone in an attempt to be save them from choking to death.

What worries me most about this situation is that Eurozone leaders appear well aware that the fundamental issue is the economic imbalance across the region, yet again they seem completely unable to consider any credible plan to address this. There is no sign that northern creditors are about to loosen fiscal policy in order to bring forwarded consumeristic demand from the populace, in fact the reverse is true, and there is certainly no new capital investment flowing into the periphery in order to support the transformation into those ‘export machines’ they are supposed to become. All we have seen up until now is a crushing of demand in the south, met with fiscal tightening in the north as everyone frets that the economy is slowing while debts continue to rise. I’m simply not sure what else they thought would happen.

Advertisement

The current political convulsions over Greece show the European leadership are once again losing their grasp on the situation with politically sanitised ‘kick the can’ solutions up for offer while they hope for god-knows-what to occur to dig them out of the hole they’ve all dug themselves. Previously this type of failure would inevitably be met with another round of emergency action from the ECB but with the OMT in place Draghi looks to be at his limits.

That all being the case, 2013 is certainly looking extremely risky in terms of political and social stability in many nations because, as you can see from the data, this just ain’t getting any better.

Links to French and German reports below:

Advertisement

EuroZone Flash PMI Nov 2012