Eurozone recession baked in

Another night of Eurozone Purchasing Manager Index (PMI) reports, this time in services, with remarkably similar results to the manufacturing indexes:

Overall outside of a few upside surprises, such as that from Ireland, the data continues to follow my overall theme of “Periphery nations weakening, France in the middle, Germany outperforming, but the whole ship slowly sinking”.

Actually , to be honest, I am a little more worried about France than that statement suggests. If you have been following my European posts for a while you may remember my warning on the country back in July last year and my repeat of those concerns again in December. In case you haven’t read those posts my basic premise is that France isn’t that much different from some of the periphery nations in terms of its macro economic statistics. As I said:

A quick glance at French fundamentals tells you they are in a similar position as the Portugal, Italy, Greece and Spain. High debt in both the public and private sectors, trade imbalance that continues to grow and a current account that has been in the red for years.

Although it can be a little crude to compare nations in this way without some more rigorous micro-level analysis , as I discussed in regard to Australia, nations with these sort of statistics tend to have economies structured around credit driven internal consumption above production. Although France does have a large industrial base which may protect it somewhat, in most cases economies structured in this way perform worse than “expected” once austerity is applied because of the dependency on debt to maintain national income and asset values.

The fact that the “fiscal compact” is slowing demand in so many Eurozone countries is also be having an effect on the tradable sectors of countries that rely on intra-European trade. This is where Ireland has the advantage because its largest export partner is the US.

To the data….

German Services PMI

At 52.1 in March, down from 52.8, the headline seasonally adjusted Germany Services Business Activity Index dropped for the second month running and pointed to the slowest rate of growth since November 2011. The latest reading – which is based on a single question asking respondents to report on the actual change in business activity at their companies compared to one month ago – signalled only a moderate rate of expansion that was slower than the long-run series average (53.1). Increased service sector output has now been recorded for six months running, but the strength of the upturn has moderated from January’s recent high amid subdued intakes of new work.

French Services PMI

Broad stagnation of French service sector output was sustained for a second successive month in March. This was driven by a flat level of new work intakes. Subsequently, backlogs of work declined, and at a faster rate than in February. Employment was also unchanged on the month. Despite this, there was a further strengthening in future expectations. Meanwhile, charges rose for the first time in three months, with input costs continuing to increase.

Spanish Services PMI

March data pointed to slower declines in both activity and new orders, but rates of contraction remained solid in each case. Moreover, staffing levels were lowered at an accelerated pace. Higher fuel costs led to a return of input price inflation, but strong competition amid weak demand meant that companies continued to lower their output prices sharply.

The headline seasonally adjusted Business Activity Index – which is based on a single question asking respondents to report on the actual change in business activity at their companies compared to one month ago – rose to 46.3 in March, from 41.9 in the previous month, to signal a much slower reduction in activity at Spanish service providers than was recorded in February. That said, activity still decreased at a solid pace, extending the current sequence of reduction to nine months


Employment declined at a considerable, and accelerated pace in March. Staffing levels have now decreased in each of the past 49 months, and respondents linked the latest reduction to workforce adjustments in line with falling demand. All six sectors posted job shedding.

Italian Services PMI

March data continued to show the Italian service sector in recession, with both activity levels and new business inflows falling markedly over the month. Staffing numbers were reduced again as businesses attempted to guard against rising input costs, while expectations regarding future performance remained low by the historical standards of the series.

The seasonally adjusted Markit/ADACI Business Activity Index posted at 44.3 in March, little- changed from 44.1 in February, signalling a further marked contraction in Italian service sector output. Anecdotal evidence suggested that this tenth successive monthly decline in activity was primarily the consequence of both lower purchasing power and lingering uncertainties among clients.

Irish Services PMI

The seasonally adjusted Business Activity Index – which is based on a single question asking respondents to report on the actual change in business activity at their companies compared to one month ago – remained above the 50.0 no- change mark in March, posting 52.1, from 53.3. That said, the rate of expansion was slightly weaker than that seen in February. Companies reported signs of improving market conditions.

Service providers were optimistic that activity will be higher in 12 months’ time than current levels, with respondents forecasting improved economic conditions, increased marketing activities and growth in new export business. Moreover, the level of positive sentiment was the highest since May 2010.

EuroZone composite PMI

Latest PMI data provided further evidence of a mild contraction of the Eurozone private sector economy during March. The latest decline also meant that output fell over the first quarter as a whole, raising the likelihood that the economy has fallen back into technical recession.

At 49.1 in March, the Markit Eurozone PMI® Composite Output Index fell to a three-month low, but came in above the earlier flash estimate of 48.7. The average reading of 49.6 in the first quarter was nonetheless an improvement on the average of 47.2 seen in the final quarter of last year.

So under the influence of austerity Europe as a whole continues to slow. Economists seem to be calling for a weak, shallow recession which maybe possible if we continue to see strength from the US, but I am doubtful. What we are seeing is a slowing of internal demand in many Eurozone nations which is putting downward pressure on GDP. This started out as a periphery-only issue but it now slowly making its way into the economic core of Europe. Unless we see a reversal of these policies or a major improvement in the rest of the world then I see little reason why this will not continue and at present this is my base case.

In other news, overnight Spain held a bond auction and the results were anything but spectacular:

Spain sold 2.59 billion euros ($3.4 billion) of bonds today, just above the minimum amount it planned for the auction and below the 3.5 billion-euro maximum target. The average yield on the bonds due in October 2016, which act as the five-year benchmark, rose to 4.319 percent from 3.376 percent at last month’s sale. Secondary-market yields rose to 4.48 percent.

Spain’s 10-year borrowing costs are approaching the levels seen in December, before the European Central Bank said it would make unlimited three-year loans to banks. Some of the 1 trillion euros taken in the so-called LTROs has been recycled into high- yielding government debt, which initially helped shave as much as 95 basis points off Spanish yields before they began to rise again in March.

In the aftermath yields on Spanish paper are moving higher with the Spanish 2 yr bond yield jumping over 10%.  As I states back in early February:

…. Spain which I consider to be the major unrecognised problem. The country has seen its yields tumble since December on the back of the ECB’s 3-year LTRO but there hasn’t been anything in the economic metrics of the country to support such action. Spain has 23% unemployment and still rising, the banking system is under-capitalised and still has unknown exposure to the country’s housing market collapse.  On top of that the rising unemployment rates is pushing up bad loans in the banking system to 7.4%, a 17-year high, and is still rising.

The country is also showing the same well known signs of what happens when you attempt government austerity when the private sector is attempting to deleverage without surplus in the external sector.


As the data shows, this is is not a country that is on a sustainable path to recovery as the economy appears to be rapidly deflating. However, as I noted back in November, the new government of Mariano Rajoy doesn’t seem to have any plans outside of continuing austerity based policy.

There is no back-up mechanism in Europe big enough to save Spain which is why it is a concern to me that the financial markets don’t appear to have fully recognised the risk associated with the country.

Now that the markets are beginning to understand the limitations of what the ECB’s LTRO can achieve, it appears they are finally waking up to the reality of Spain’s problems. This is probably being helped somewhat by the Spanish PM, Mariano Rajoy:

“Spain is facing an economic situation of extreme difficulty, I repeat, of extreme difficulty, and anyone who doesn’t understand that is fooling themselves.”

They most certainly are.

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  1. reusachtigeMEMBER

    Unlike some of the other PIIGS, there’s a collective consciousness in Ireland where they all hold themseleves responsible for allowing things to occur the way they did causing the crash so there’s also a collective consciousness that they all have to work hard together to pull themselves out because they aren’t willing to settle for being a backwater like they once were.

    Whinging occurs but it’s more a private outlet of the individual rather than a desire to join together, cause havoc and scream “poor me”.

    • Sorry I can’t comment on such cultural things, although this may ( or may not) be the case, Ireland’s economic structure was export-focussed going into the crisis.

      Not that it hasn’t been without pain, but this has allowed them to lean on their export sector to drag them forward, the current strength of the US is helping in that regard.

      This is not something that the other periphery nations can rely on.

      In other words, structure matters.

      • interested party

        DE, do you see any export biased economy within the EZ actually growing it’s way out from the debt burdens being imposed? At least out of the peripherals?

      • I imagine in a ideal world every nation would oscillate between trade deficit and surplus over time, with floating exchange rates ensuring niether deficits nor surplusses become chronic. Doesn’t seem to work that way in practice, especially when you adopt a common currency that entrenches the imbalances.

        • interested party

          With the LTRO’s papering over the huge deficits that these countries are running, it is far from an ideal world. More like a surreal world to me.

          I worry for us here in OZ but am thankful we are not in the EZ.

  2. interested party

    If you look at the fact that consumption from the future has been used to fuel the boom years pre 2007, and TPTB see some twisted logic in going further into the future and taking the resources from that generation via LTRO’s and other debt packages, then somewhere, sometime, the game ends. It has to. Any views to the contrary are nonsensical.

    A simple solution to the problem is to let the whole zone default, learn from it, and move on.
    This is way to simplistic for reality, I know, and would be very disruptive. However, what we are seeing is also disruptive and dishonest to the common people.

    A question….at what point does a recession turn into a depression?

  3. I saw this supporting argument, and while nothing new it’s worth a read.

    Despite these positive developments, three main criticisms have been made of the LTROs (see De Grauwe 2012):

    – Moral hazard: The liquidity injections in the banking system created moral hazard problems that are more dangerous than those resulting from direct ECB intervention.

    – Excessive liquidity provision: Because banks channelled only a fraction of the liquidity they obtained from the ECB into the government bond markets, the ECB had to pour much more liquidity into the system than if it had decided to intervene itself.

    – Limited chance of success: The austerity programmes imposed by the European Commission are pushing the peripheral Eurozone countries into a deep recession that will exacerbate their fiscal problems and will create renewed distrust in financial markets. As a result, the sovereign-debt crisis will explode again.