It shouldn’t really be news to anyone, but the latest PMI data once again shows that Europe is heading into technical recession. Comments from Rob Dobson, senior economist at Markit Economics, give a good wrap of the data:
The August Markit Eurozone Flash PMI reinforces the prevailing view of the economy dropping back into recession during the third quarter of 2012. Taken together, the July and August readings would historically be consistent with GDP falling by around 0.5%-0.6% quarter-on-quarter, so it would take a substantial bounce in September to change this outlook.
The downturn is still led by the manufacturing sector, despite its pace of contraction easing a little this month. The service sector is also not out the woods, as business activity declined at an accelerated pace.
The real interest inevitably comes from the national breakdown. Hopes that German economic strength will aid recovery in the broader currency union were dealt a blow by its rate of economic contraction accelerating, and further signs that its export engine has slammed into reverse gear. France may be edging closer to stabilisation, while conditions outside of the big-two remain weak overall. This is leading to job losses across much of the region, although Germany did provide some brighter news by bucking this trend and raising payroll numbers.
On the price front, manufacturers are still benefitting from declining input costs. Alongside further selling price discounts from both manufacturers and service providers alike, this suggests that inflationary pressures will at least remain muted in the near term.
So it looks like August is showing some stabilisation in the rate of contraction, but European economic activity continues to shrink and the forward looking indicators are weakening. As I have stated many times before this is all very much a predictable outcome of the European policy response to their financial crisis and continues to be counter productive in regard to improving debt to GDP for periphery Europe.
Germany’s economy, being export driven, is highly susceptible to falls in external demand and foreign orders for the country’s goods fell at the fastest rate in more than three years. This trend appears to be matched by both China and Japan which once again suggests that the Eurozone’s woes have leaked beyond their borders and are exacerbating economic issues in other regions. German economic growth fell to 0.3% in Q2 lead by a fall in investment, the collapsing forward indicators suggest a contraction in Q3 is on the way.
The rest of Europe is also showing some stabilisation in the rate of decline, but again remains deeply in contraction. Falling economic activity appears to be leading to increasing unemployment which, once again, will be counter productive in terms of debt servicing in both the public and private sectors. All up, Europe continues to suffer the fallout of attempts to de-leverage the public sector at a time when the private sector is unable to compensate for the loss of income and external sector is either in deficit or weakening.
The only upside I can see at this point is in terms of the political effects of the data. My long term opinion has been that we wouldn’t see any significant action from Europe until either the German or Italian economies came under threat, although given the delusional policies that was only ever a matter of time. A failing German economy will all but force the EZ political class to agree on a future plan for the Eurozone, one way or another, and at this stage you would have to think this data helps Mario Draghi’s with his political “jaw boning”.
I am, however, concerned that the timing of Germany’s fall is a problem for Greece. As I said earlier in the week we are again at a cross-roads for the country where northern creditors have to make renewed decisions on how to deal with the country. Obviously a ‘Grexit’ presents issues for the monetary union in terms of perceived ‘irreversibility’, but with German economic activity now falling it will become increasingly politically difficult for Germany to continue to fund Greece.
Overnight we heard from both the German Finance Minister ,Wolfgang Schaeuble, and the German Economics minister, Philipp Roesler, who basically stated that they think the Greek economy is unsalvageable, and providing any additional funds isn’t going to help. We now await the Troika report in early September to determine what happens next, but if German economic activity continues to fall I do wonder how exactly Angela Merkel is going to explain to German citizen’s why they should be providing more money to Greece, which has been described as a waste of time by their leaders, when work needs to be done at home.
Either way we are unlikely to hear the final decision before mid-October, at the next EU summit, but the political rhetoric over the coming weeks should give a fair indication where this is heading.
PMI Report summaries below:
German private sector output falls at faster rate during August. Renewed services contraction offsets slower drop in manufacturing activity.
- Flash Germany Composite Output Index(1) at 47.0 (47.5 in July), 38-month low.
- Flash Germany Services Activity Index(2) at 48.3 (50.3 in July), 37-month low.
- Flash Germany Manufacturing PMI(3) at 45.1 (43.0 in July), 3-month high.
- Flash Germany Manufacturing Output Index(4) at 44.6 (42.2 in July), 2-month high.
At 47.0 in August, down from 47.5 during July, the seasonally adjusted Markit Flash Germany Composite Output Index posted below the 50.0 no-change value for the fourth consecutive month. The latest reading was much weaker than the long- term survey average (53.0) and signalled the steepest rate of private sector output contraction since June 2009. A sharper reduction in overall business activity reflected a return to falling output in the service economy. While the rate of decline in service sector activity was relatively modest, it was nonetheless the fastest for just over three years. Manufacturers pointed to a steeper fall in output than service providers during August, but the rate of contraction in the sector eased since the previous month.
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.
French private sector output falls at slower pace in August
- Flash France Composite Output Index(1) rises to 48.9 (47.9 in July), 6-month high
- Flash France Services Activity Index(2) posts 50.2 (50.0 in July), 7-month high
- Flash France Manufacturing PMI(3) increases to 46.2 (43.4 in July), 4-month high
- Flash France Manufacturing Output Index(4) climbs to 46.1 (43.3 in July), 4-month high
Latest Flash PMI data signalled a reduction in French private sector output for the sixth consecutive month in August. However, the rate of contraction eased to only a modest pace. The Markit Flash France Composite Output Index, based on around 85% of normal monthly survey replies, recorded 48.9, up from 47.9 in July. Service sector business activity was broadly stable in August for the second month running. Manufacturers meanwhile reported the slowest fall in output since April.
The weaker drop in activity reflected a moderation in the rate of contraction of new business during August. The latest fall in new work was the least marked in five months, reflecting a considerably slower drop in manufacturers’ new orders. Service providers signalled a slightly faster reduction in new business than one month previously.
Outstanding business in the French private sector similarly decreased at a slower rate during August. The rate of decline in backlogs across the French private sector eased to the weakest in five months.
Composite data showed that job losses continued in August, with the rate of decline unchanged from July. A faster reduction in service sector employment was offset by a weaker fall in manufacturing staffing levels. Lower payroll numbers were attributed by survey respondents to a combination of declining activity and cost-cutting.
Downturn in Eurozone economy extends into seventh month
- Flash Eurozone PMI Composite Output Index(1) at 46.6 (46.5 in July). Seventh straight contraction.
- Flash Eurozone Services PMI Activity Index(2) at 47.5 (47.9 in July). Two-month low.
- Flash Eurozone Manufacturing PMI(3) at 45.3 (44.0 in July). Four-month high.
- Flash Eurozone Manufacturing PMI Output Index(4) at 44.6 (43.4 in July). Two-month high.
The Markit Flash Eurozone PMI Composite Output Index – based on around 85% of usual monthly replies – was broadly unchanged at 46.6 in August, from a final reading of 46.5 in July. The index has now signalled a contraction of the Eurozone private sector for seven successive months.
Output declined in both the manufacturing and service sectors, with manufacturers again reporting by far the steeper pace of contraction. However, while the pace of decline in manufacturing output eased slightly since July, that signalled for services business activity accelerated.
The decline in total activity was widespread across the currency union. Flash readings for France and Germany pointed to contractions, with the rate of decline easing in France but gathering pace in Germany. There was also a further marked decline in output outside of the big-two economies.
The latest decline in overall output mainly reflected a further marked drop in new orders. Incoming new business fell for the thirteenth consecutive month, although the rate of contraction was less sharp than July (which was the steepest for over three years). Rates of decline slowed at both manufacturers and service providers.
The export performance of manufacturers also remained in the doldrums during August. New export orders (including intra-Eurozone trade) declined for the fourteenth month running, with the rate of reduction the sharpest since last November. This reflected not only the ongoing weaknesses of the Eurozone market, but also a softer rate of global economic expansion.
The ongoing downturn in the Eurozone economy filtered through to the labour market. Staffing levels declined for the eighth consecutive month, with payroll numbers cut at both manufacturers and service providers.
Employment in France declined for the sixth month running – but to a lesser degree than one month earlier – while further job losses were initiated outside of the big-two nations. Brighter news came from Germany, where workforce numbers edged higher following a slight reduction in July.