European recession eases

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Some more slightly positive, yet mixed, news out of the Eurozone overnight with services and composite PMI readings for May.

Euro_Comp_PMI
  • Final Eurozone Composite Output Index: 47.7 (Flash 47.7, April 46.9)
  • Final Eurozone Services Business Activity Index: 47.2 (Flash 47.5, April 47.0)
  • Germany ekes out marginal growth, while downturns ease in Spain and France

The downturn in the eurozone economy eased for the second month running in May. Rates of decline eased for both manufacturing production and
service sector business activity, reaching 15-and three-month lows respectively.

At 47.7, the final Markit Eurozone PMI Composite Output Index was in line with its earlier flash estimate and above April’s 46.9. Germany edged out of contraction territory in May, as an improvement in its manufacturing sector offset a slight decrease in service sector business activity. Although the downturns in France, Spain and Italy all remained marked, rates of contraction eased to a five-month low in France, 23-month low in Spain and stabilised in Italy.

The outlook for eurozone output is likely to be impacted by the ongoing deterioration in new order inflows as new business contracted for the twenty-second successive month. Service sector new business fell at a sharper pace than the prior month, whereas the downturn in manufacturing orders moderated to a slight pace.

Comments from Markit’s chief economist again set a not-so-optimistic tone on the short term future:

The final PMI confirms the message from the earlier flash reading that the eurozone remains gripped in the longest recession since the birth of the single currency, set to endure a seventh successive quarter of decline in the second quarter. The survey points to GDP falling by 0.2%, similar to the decline seen in the first quarter.

Policymakers and politicians will nevertheless seek solace in the fact that the rate of decline has now eased for two consecutive months, and that Germany is stabilising. Downturns have also eased in France, Italy and especially Spain since earlier in the year.

However, the reality is that the region lacks any growth drivers, making it difficult to believe that anything better than a mere stabilisation of economic activity remains unlikely for the foreseeable future.

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Once again it’s a bit of a mixed bag. Spain is looking far better than it was a few months ago, with the deterioration in services slowing along with manufacturing. We also saw reported jobless falls from the country this week which again, although seasonal, is positive news. On the downside both Italy and France are looking worse and they obviously are far larger economies of that of Spain. Italy is showing news signs of weakness with accelerated contractions in business activity, new work and employment along with a further deterioration in business confidence. France again showed strong weakness in new business and business confidence and unemployment remains on the rise. Fortunately the manufacturing downturn eased in both countries but both are still showing contraction across the economy.

In related news, the EZ Q1 GDP figure was confirmed at -0.2% QoQ overnight while the YoY figure was revised down a little to -1.1%. The QoQ figure is an improvement -0.6% figure from the previous quarter but still shows contraction, and therefore continued recession in the zone. In more negative news the retail sales data for April showed a drop of 0.5% from March after a fall of 0.2% in that month. Although not a 100% accurate retails sales are a fair proxy for growth and it looks as though Q2 got off to a fairly bad start. Obviously with GDP falling debt-to-GDP ratios tend to head in the wrong direction and this is certainly what we continue to see across the EZ even with government austerity attempts.

As I’ve been stating over the last month the easing of wage inflation restraints in Germany should hopefully lead to some greater support for re-balancing of the zone. Unfortunately the services sector in Germany still appears to be in contraction, which suggests that this isn’t yet flowing through to greater consumption in the domestic economy.

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All up it could be worse, but there is still further economic contraction and unemployment out of this data.

Full EZ PMI report below.

EuroZone Composite PMI May 2013