Auf wiedersehen European economy

Another night of purchasing management index data from the Eurozone and, once again as expected, the data was a disappointment. Recession approaches for the zone as a whole, Germany has moved into contraction while the periphery continues to suffer from a deep recession, and in some cases depression. Manufacturing has collapsed across the region while the only upside appears to be from the French services sector.

Overall this data continues to be woeful as Markit Economic’s chief economist explains:

The flash PMI for July suggests the euro area downturn showed no signs of letting up at the start of the third quarter and is consistent with GDP falling at a quarterly rate of around 0.6%, which is similar to the rate of decline we expect to see for the second quarter.

The downturn is being led by an increasingly severe slump in manufacturing, where output is falling at a quarterly rate of around 1%. Germany is now contracting at the steepest rate for three years, while the rate of decline in the periphery is also among the highest seen since mid-2009. The only sign of improvement was limited to the French services sector, which is likely to be due to domestic business settling down again after the general elections and could therefore prove temporary.

Companies across the region are cutting staff numbers at the fastest rate for two-and-a-half years as the outlook darkens. Service providers are now the gloomiest since March 2009, while manufacturers are slashing their inventories of raw materials in the expectation of ongoing weak sales in coming months.

Companies also cut prices to the greatest extent since early-2010 to help boost ailing sales, which should help alleviate inflationary pressures but may hit profits. Falling input costs should help protect profit margins in manufacturing, but costs continue to rise in services.

More details below.

Flash Eurozone PMI

Ongoing downturn drives rate of job losses to highest for two-and-a-half years

  • Flash Eurozone PMI Composite Output Index(1) at 46.4 (46.4 in June). Sixth successive contraction.
  • Flash Eurozone Services PMI Activity Index(2) at 47.6 (47.1 in June). Four-month high.
  • Flash Eurozone Manufacturing PMI (3) at 44.1 (45.1 in June). 37-month low.
  • Flash Eurozone Manufacturing PMI Output Index(4) at 43.6 (44.7 in June). 38-month low.

The Markit Eurozone PMI® Composite Output Index was unchanged at 46.4 in July, according to the preliminary ‘flash’ reading which is based on around 85% of usual monthly replies. The index therefore signalled that the private sector economy contracted for the tenth time in the past 11 months, with the rate of decline unchanged on June.

The July reading was in line with the average seen in the second quarter, for which the PMI signalled the steepest quarterly downturn for three years.

Manufacturers reported a sharper deterioration in business conditions than services providers in July. Manufacturing output fell at the steepest rate since

May 2009, while the rate of decline in the services economy eased slightly for the second month running to the weakest for four months.

Output fell in response to an accelerated rate of loss of new business, which suffered the joint- second fastest rate of decline in over three years. Service sector new business fell at the fastest rate since May, while manufacturers reported the second-steepest fall since last November.

The fall in output was widespread across the single currency area, with both the core and periphery contracting. Output fell in Germany for the third month running, dropping at the fastest rate since June 2009. Services slipped only slightly further into contraction, but manufacturing saw the largest decline for just over three years.

French output fell for the fifth successive month, though the rate of decline eased slightly for the second month running to reach the weakest for four months. The improvement was limited to the service sector, however, where activity rose marginally for the first time since March. French manufacturers, in contrast, saw the largest drop in production since April 2009.

Employment fell for the seventh straight month across the Eurozone, dropping at the fastest rate since January 2010 as increasing numbers of firms cut capacity. Job losses gathered pace in both manufacturing and services, with the former posting by far the steeper rate of decline.

While employment fell only marginally in Germany, French payroll numbers were cut at the fastest rate since December 2009. Elsewhere across the region employment was cut at the sharpest pace since November 2009.

Flash German PMI

German private sector sees fastest falls in output and new business since June 2009

  • Flash Germany Composite Output Index(1) at 47.3 (48.1 in June), 37-month low.
  • Flash Germany Services Activity Index(2) at 49.7 (49.9 in June), 10-month low.
  • Flash Germany Manufacturing PMI(3) at 43.3 (45.0 in June), 37-month low.
  • Flash Germany Manufacturing Output Index(4) at 42.8 (44.8 in June), 37-month low.

The seasonally adjusted Markit Flash Germany Composite Output Index fell for the sixth month running in July, to 47.3 from 48.1 in June. The index has posted below the 50.0 no-change value in each month since May, and the latest reading signalled the fastest pace of private sector contraction since June 2009.

Manufacturers suffered a sharper drop in business activity than service providers during July, as well as a greater loss of momentum relative to the situation in June. The latest reduction in manufacturing production was the steepest for just over three years, while new orders received in the

sector dropped at the fastest pace since April 2009. Service providers recorded only a marginal decrease in business activity, although the rate of contraction was the joint-fastest in three years.

Across the private sector as a whole, new business intakes fell at the quickest rate since June 2009, with manufacturers and service providers both recording much sharper declines than during the previous month. Lower levels of new work have been recorded in the service economy during each month since April, and the latest reduction was the fastest for exactly three years. Meanwhile, in the manufacturing sector, new export orders declined at the steepest rate since May 2009, which contributed to a thirteenth successive monthly fall in total new business volumes.

Flash French PMI

French private sector output falls at slowest rate in four months. Stabilisation in service sector offsets weaker manufacturing performance.

  • Flash France Composite Output Index(1) rises to 48.0 (47.3 in June), 4-month high
  • Flash France Services Activity Index(2) climbs to 50.2 (47.9 in June), 6-month high
  • Flash France Manufacturing PMI(3) falls to 43.6 (45.2 in June), 38-month low
  • Flash France Manufacturing Output Index(4) drops to 43.3 (46.0 in June), 39-month low

Latest Flash PMI® data indicated that the rate of contraction in French private sector output eased further in July. The Markit Flash France Composite Output Index, based on around 85% of normal monthly survey replies, rose to 48.0, from 47.3. That was its highest level since March and indicative of only a modest rate of decline.

The weaker decline in overall private sector output was driven by a stabilisation of activity in the service sector. This ended a three-month period of falling activity at service providers. In contrast, manufacturers reported the steepest fall in output since April 2009.

New business received by French private sector companies decreased for a fifth successive month in July. That said, the rate of decline eased to the slowest since March, reflecting a weaker fall in new work at service providers. Manufacturers, however, indicated a sharper contraction of new orders, with the rate of decline only marginally slower than May’s 37-month record. Although the domestic market remained the principal area of fragility, there was also a deteriorating trend in export sales, which fell at the fastest rate in eight months.

Backlogs of work fell for a seventh consecutive month in July. The rate of contraction was slightly

faster than in June, as a sharper drop in outstanding business at manufacturers outweighed a slower fall at service providers.

There was disappointing news on the employment front, with private sector staffing levels falling at the sharpest rate since December 2009. Deeper job cuts were reported in both the manufacturing and service sectors, with the latest reductions the most marked for 34 and 30 months respectively.

Overnight the European commission also released its own economic sentiment indicator which tells a similar story:


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  1. Manufacturers reported a sharper deterioration in business conditions than services providers in July. Manufacturing output fell at the steepest rate since.

    We have an economic structure that is debt/consumption/service economy based. That is the essential problem. All the interest rate cutting etc is designed to reset that DCS structure. It seems no surprise that manufacturing is the sector hurting the most.

    It’s more evidence that the whole interest rate cutting money printing not only does little good, even temporarily, but is actually damaging to real necessary reform.

  2. Moody’s just changed the EFSF outlook from (P)Aaa rating to negative, There are a bunch of other downgrades.

    • Yes but ‘money’ won’t solve the problem.

      However, if they kick Greece out, this may give the Euro a really strong appreciation phase?
      Interested in other opinions.

      • As I understand it there is no capacity to kick out any member – happy to be told otherwise.
        I believe it’s like a marriage with the only exit policy being a “til death do us part” clause – and nations can live a long time.
        They will have to murder Greece while she sleeps.

        • Yes Peter that’s my understanding too! I guess they can make Greece’s existence within teh EU virtually impossible so that it must ‘elect’ to leave but Lord knows how that can happen either, Again there is no mechanism.
          So it’s Euro to get a further bath then?>

          • It’s unbelievable that no one thought to write a “what we do if it all goes wrong handbook”
            Even the mafia has a clearly defined exit strategy that is known to all – it’s a bit ugly but very effective.

  3. Note this update on he Reinhart and Rogoff studies from Lacy Hunt via the John Mauldin newsletter…worth a read.

    I do have some reservations about her final conclusion. The future will not be as benign as she thinks…unless Shale Gas turns out to be the great saviour that some folks tout.

    “Based upon the historical record of effects of excessive and low quality indebtedness, along with the academic research, the 30-year Treasury bond, with a recent yield of less than 3%, still holds value for patient long-term investors. Even when this bond drops to a 2% yield, it may still have value in relation to other assets. If high indebtedness is indeed the main determinant of future economic growth and further government “stimulus” is counterproductive, then a prolonged state of debt induced coma may so limit returns on other riskier assets that a 30-year Treasury bond with a 2% yield would be a highly desirable asset to hold.”

    However again I’m sure the PTB will let inflation run. So I guess she is right to that extent as well. They cannot raise interest rates. Don’t ask me a time frame.