Europe returns to recession

For those who have been following my European post for any length of time you may remember my basic macro theme for Europe is that the enactment of the fiscal compact across the zone will create the following dynamic:

Periphery nations weakening, France in the middle, Germany outperforming, but the whole ship slowly sinking.

This assessment is based on the analysis that attempts to internally devaluate interdependent nations with an aim to become export competitive is nothing more than a race to the bottom which will eventually slow the entire region including the stronger economies. As I have noted previously the only economy that appears to be bucking this downward trend is Ireland due to the fact that is has always been export competitive under the Euro and its major export partner is not European.

Overnight we saw European Q2 GDP numbers and as you can see from the chart the trend continues.

Finland, not shown in the chart, came in at -1.0%, Cypus -0.8%.

Eurostat also release the Industrial production numbers ( report below ) and the story is much the same.

Obviously the real area of concern is the nations that are currently struggling as these are the countries that present the most immediate risk. In that regards the news is not  good with YoY Industrial production down -8.2% in Italy, -6.3% in Spain and -4.4% in Portugal. Once again the only good news is from Ireland with growth of 9.5%. In terms of re-balancing it is obvious that Germany continues to pull away from the the periphery which is exactly the opposite of what is required under the single currency as it is the root cause of much of Europe’s economic problems.

It must also be noted that France’s 0% growth came from a large contribution in government spending while the external sector was a drag on GDP.

All of this data fits with what we have seen in the PMIs which suggests that the downwards trend is now baked in. One of the notable trends in the PMIs was the continuing fall in new orders across much of Europe which suggests industrial production, and therefore GDP,  has further to fall.

The other data pointing to continuing economic, and possibly political, issues is unemployment. Spain currently has rate of 24.6%, Italy nearly 11% and rising, Greece at 23% and as of yesterday Portugal has too reached a new eurozone record.

Portugal’s jobless rate rose to a euro-era record 15 percent in the three months through June as the country’s economy contracted for a seventh quarter.

The unemployment rate increased from 14.9 percent in the first three months and 12.1 percent in the second quarter of 2011, the Lisbon-based National Statistics Institute said today in an e-mailed statement.

The government forecasts unemployment will increase to 15.5 percent for all of 2012 and to 15.9 percent in 2013.

With even Portugal, the Troika’s model student, now accelerating into in economic trouble the rest of 2012 is looking increasingly troublesome for Europe.

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  1. DE,

    ” One of the notable trends in the PMIs was the continuing fall in new orders across much of Europe which suggests industrial production, and therefore GDP, has further to fall.”

    A portion of this decline must be also due to China’s slowing and thereby it’s slowing demand for Euro manufactured items. Is a breakdown available indicating where orders are coming from and how orders have performed historically?

    • I don’t have the data on this so it is hard to tell. I suspect, however, that this is an interdependent thing. i.e China is slowing, in part, because one of its major export partners the EuroZone is slowing.

      The other thing to note from the PMIS is that they tend to say things like

      ” Output was lowered in response to a further substantial decrease in the volume of incoming new orders. Data suggested that domestic demand remained the principal area of weakness, although export sales showed a deteriorating trend”

      Which suggests much of this is falling internal demand caused by weak economic conditions and continued austerity.

  2. the thing I enjoy about MB is the intelligent debate and various views. On “The Business” last night the author of the book “Currency Wars” had some “interesting” views on issues EU. He would appear to be the only person outside of Merkel who strongly advocates Germany’s policy decisions as the right way to go? It has been suggested here and at other places that germany is a beneficiary of the lower Euro. He does not agree with this view.

    Any comments/thoughts?

    • I didn’t see the show, so I can’t comment directly on what was said, but the Euro’s relativity to the rest of the world isn’t the major issue as I see it. Yes it has been an advantage for German trade to have a weaker than otherwise Euro, however the major advantage for Germany has been that the growing indebtedness of their export partners has added to their wealth.

      This was caused by a imbalance in fiscal, monetary and industrial policy across the zone that was hidden for many years because deregulated banking allowed for large capital flows to fill the gaps.

      I discussed this here.

      The major issue now is that Germany appears to be setting the agenda based around the idea that indebted nations should follow their example to export led prosperity. There is nothing wrong with this per se, but this neglects their own dependency on their trading partner to get there. In other words, unless Germany is now willing to return the favour the whole thing is likely to fail.

      You are now seeing this issue manifest in a fight between the ECB and Germany as the Germans appear to be unwilling and/or unable to become the consumers of Europe that would re-balance the eurozone in the absence of an internal floating currency

      • DE

        thank you for your considered reply I genuinely appreciate it. I agree with you and couldn’t disagree more with this guys views

      • DE, in this BBC doco eurosceptic Michael Portillo visits debt-stricken Greece and poses the question Euro or Drachma – Euro every time. His visit to Germany well illustrates the Germans firmly held belief that other nations (eg Greece) must adopt austerity measures for considerable period to rebuild to strength – just as Germany has had to practice fiscal discipline necessary to accommodate reintegration of East Germany – thought this really captured the essence of the German view.

        Also have quite like the work of Oliver Hartwich (formerly CIS) who has article in BS today, the views of Vito Tanzi may be of interest.

        • 3d1k,

          Thanks for the link to the video. I am interested to understand a couple of things.
          1. A new Porsche Cayenne cost $47,000 Euros? Why do these same cars cost so much more in Aus. Not that I want one but I thought Tariffs were minimal these days. Also I thought the Porsche spokesman who said Greece wasn’t an important part to the “porsche miracle” was deluded to think that all sales, how ever small are not important.
          2. A dock workers wages were $1500 to $2000 Euros per month and they are now being asked to work for $600 Euro a month. So annual salary has reduced from $24k to $7.2k. Surely this can’t be correct. This is $3.67 an hour?????????

          If the average wage of an Australian is north of $50k and I would assume our dock workers aren’t the average, how will Australia ever compete.