There was a hint from yesterday’s China PMI that the good news from global trade was looking very toppy. There was therefore a good chance that the powerhouse of Europe, German, was going to disappoint with its PMI number overnight, and it certainly managed that.
April data indicated a decline in German private sector output, thereby ending a four-month period of expansion. This was highlighted by the seasonally adjusted Markit Flash Germany Composite Output Index posting 48.8 in April, below the crucial 50.0 no-change value and down from 50.6 in March. The latest reading indicated a moderate reduction in private sector business activity, with the pace of decline the fastest since October 2012.
The manufacturing and service sectors both registered renewed falls in output levels during April, with the former posting a slightly faster rate of contraction. The decrease in manufacturing production was the first so far in 2013, while the reduction in service sector activity was the first in five months and the most marked since last October.
It must be noted, however, that this isn’t the first round of “core rot” we have seen from Europe, and Germany has managed to bounce back before. What hasn’t changed though is the on-going and sustained contraction across the rest of the zone.
The Markit Eurozone PMI Composite Output Index was unchanged on March’s reading of 46.5 in April, according to the flash estimate. The sub-50 reading indicated a drop in activity for the nineteenth time in the past 20 months, the exception being a marginal increase in January 2012.
Activity fell sharply again in both manufacturing and services. While the former saw the steepest rate of decline for four months, the latter saw the downturn ease slightly compared with March.
New business fell for the twenty-first successive month, with the rate of deterioration accelerating for the third month in a row to signal the steepest decline since December. Marked falls were seen in both manufacturing and services.
Markit Economics chief economist provided the following wrap on the data.
Although the PMI was unchanged in April, the survey is signalling a worrying weakness in the economy at the start of the second quarter, with signs that the downturn is more likely to intensify further in coming months rather than ease.
Thanks to an upturn in the survey at the start of the year, the PMI suggests that euro area GDP fell by around 0.2-0.3% in the first quarter after a 0.6% drop at the end of last year. However, the April reading points to a 0.4% rate of decline, with downside risks. Worryingly, the rate of loss of new business gathered further momentum, suggesting that activity and employment could fall at steeper rates in May.
The renewed decline in Germany will also raise fears that the region’s largest growth engine has moved into reverse, thereby acting as a drag on the region at the same time as particularly steep downturns persist in France, Italy and Spain.
Policymakers will at least be relieved to see inflationary pressures cooling, which could further open the door to renewed policy stimulus.
So the data still stinks and looks to be getting worse, which means we can expect even higher unemployment from Eurostat in the next round of data and more announcements of lower GDP expectations over the coming months. The door is now open for the ECB to do a little more on the policy front, but as we’ve seen over the last 3 years much of the issue is demand not supply of credit so the outcome can be expected to be muted at best.