I’ve always thought the the fiscal compact would be a economic disaster for Europe, and have said as much many times. However, even though my base case has always been that this ideological misguidance would lead to a slowing Europe, and that Europe’s recession had but barely begun, I must admit that even I am surprised by the speed at which the downturn now appears to be accelerating in some weaker nations. Obviously, as I have stated many times before, this will in turn bring down the core.
Final Eurozone Composite Output Index: 46.0 (Flash 45.9, April 46.7)
Final Eurozone Services Business Activity Index: 46.7 (Flash 46.5, April 46.9)
Widespread weakness across the currency union, with output falling across the big-four nations
At 46.0 in May, down from 46.7 in April, the Markit Eurozone PMI® Composite Output Index signalled the steepest rate of decline in manufacturing and services output in the single currency area since June 2009. The headline index came in slightly above its flash estimate of 45.9, but remained below the neutral 50.0 mark for the fourth month running.
May services PMI data indicates that the sector has fallen into a steepening downturn, in tandem with the stronger decline in the goods-producing sector signalled by Markit’s manufacturing data last week. There were also further signs of weakness spreading from the non-core to core nations, with even Germany slipping back into contraction.
German output fell for the first time since last November and, although only modest, the rate of decline was the fastest for almost three years. The downturns in France and Spain accelerated, while Italy saw an easing in its rate of decline but remained firmly mired in a steep downturn.
Companies were again blighted by the persistent weakness of demand, leading to further job losses. New business fell at the fastest pace for almost three years, with accelerated falls signalled in Germany, France and Spain, while Italy also posted a further substantial decline.
Job losses were reported for the fifth successive month in May. However, the rate of decline eased slightly, mainly due to a slight bounce in German staffing levels. In contrast, France, Italy and Spain all saw employment decline.
Signs of spare capacity were still prevalent, as highlighted by another sharp fall in levels of outstanding business. The big-four euro nations all reported making inroads into backlogs of work.
Cost pressures eased further in May, as companies benefitted from lower commodity prices and subdued wage demands. Average input prices rose at the weakest pace for six months, with cost inflation easing in each of the nations covered by the surveys. Germany and Italy continued to report solid increases nonetheless, whereas input prices barely rose in France and Spain.
Pricing power remained muted at both manufacturers and service providers in May, as the combination of strong competition and weak demand restricted their ability to pass on higher costs. Germany was the only nation to report an increase in average charges, while the greatest degree of price discounting was seen in Spain.
Final Germany Services Business Activity Index(1) at 51.8 in May, down from 52.2 in April.
Final Germany Composite Output Index at 49.3 in May, down from 50.5 in April.
May data pointed to a renewed slowdown in German service sector growth, as falling levels of incoming new work continued to weigh on business activity levels. At 51.8, down from 52.2 in April, the final seasonally adjusted Germany Services Business Activity Index pointed to the slowest pace of expansion since November 2011. Higher levels of output have now been recorded for eight months running, but the pace of expansion in May was below the average seen since the survey began 15 years ago (53.0).
Increased levels of business activity were seen across all six broad areas of the service economy monitored in May. Hotels & Restaurants were the best performing category during the latest survey period, while Financial Intermediation saw the slowest pace of expansion.
Adjusted for seasonal factors, the final Germany Composite Output Index – which measures the combined output of the manufacturing and service sectors – posted 49.3 in May, down from 50.5 in April and fractionally below the 50.0 no-change value. Although the drop in output was only marginal, it was the first for six months and the most marked since July 2009.
Final Markit France Services Activity Index(1) at 45.1 (45.2 in April), 7-month low.
Final Markit France Composite Output Index(2) at 44.6 (45.9 in April), 37-month low
French service providers registered another sharp decrease in business activity during May. Underlying the weak performance was a second successive fall in incoming new business, while backlogs of work fell further. Companies responded by cutting employment. Input price inflation eased to the slowest for over two years, allowing companies to reduce their charges further. Panel members continue to anticipate growth of business activity over the next 12 months, but the degree of confidence dipped in May to a four-month low.
The seasonally adjusted final Markit France Services 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 with one month ago – posted 45.1 in May, fractionally lower than April’s reading of 45.2. The latest contraction was the sharpest in seven months. With manufacturers also reporting a sharper fall in output during May, overall activity across the French private sector decreased at the fastest pace since April 2009.
Panel members indicated that the decline in activity was primarily a result of reduced inflows of new work. Although slightly slower than recorded in April, the rate of contraction in new business remained marked. Survey respondents commented on tough market conditions and client hesitancy amid an uncertain economic outlook. In the manufacturing sector, new orders declined at an accelerated rate in May. Consequently, overall new business in the French private sector fell at the fastest pace for 37 months.
Activity and new business both decline at faster rates
Job shedding intensifies
Sharp cuts in output prices as cost inflation eases
The Spanish service sector fell further into contractionary territory during May as the economic crisis showed no signs of easing. Rates of decline in activity, new orders and employment all accelerated during the month. Meanwhile, input prices rose only slightly as companies attempted to reduce costs, and output prices were cut sharply again in response to strong competition and weak demand.
At 41.8, down from 42.1, 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 – signalled that activity decreased for an eleventh successive month in May, and at a substantial pace that was the sharpest since last November. Companies reportedly lowered their activity in line with falling new business.
The Post & Telecommunications sector was a particular source of weakness, posting the fastest reductions in both activity and new business of the six monitored sectors. In line with the trend for activity, new orders fell at a sharper pace during May. The eleventh consecutive reduction was the fastest in three months. Respondents indicated that new business had been increasingly hard to secure given the economic crisis in Spain.
Business activity and new work both decrease markedly
Employment falls at slowest rate for seven months
Cost inflation weakest since last November
The health of the Italian service sector deteriorated during May, with steep falls in both output and new business recorded. Confidence with regards to activity in the forthcoming year dipped further, though employment levels fell at a slower rate. Cost inflation meanwhile eased to the weakest in six months, but still contrasted with a sustained drop in output prices.
The seasonally adjusted Markit/ADACI 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 – posted at 42.8 in May, up slightly from April’s 34-month low of 42.3, and signalled another marked contraction in Italian service sector output. The decrease was the twelfth in as many months, and attributed by survey respondents to reductions in both incoming new business and work from existing clients.
New work placed at Italian service providers fell for the thirteenth month running in May. As was the case with output, the latest decline in new business intakes was fractionally weaker than that recorded in April, though still sharp overall. Demand was generally considered by panellists to have fallen over the month, with a number of firms reportedly losing major clients.
And it is really the last one that we should be most concerned about. As I said late last month:
If Spain is worrying enough then there is always Italy, the real Eurozone end-game, and the slow-but-sure creep of contagion.
The recent earthquakes in northern Italy may have played a small part in this data and most likely will in future releases, as Reuters reports:
The rich biomedical industry nestled around the mediaeval town of Mirandola has shut up shop after being hit by two earthquakes in May, raising concern that serious economic damage could be done to one of Italy’s most productive regions.
Mario Monti has done his best to keep his country under the radar, but if the PMI-to-GDP trend holds then Italy is about to give Spain a run for the main point of concern for Europe. Once that occurs, no matter what the European technocracy can come up with, and independent of the concerns of Greece, the Eurozone has a very serious existential problem.
