Europe's Economies Move Sideways In June

The eurozone economies moved sideways in June, with the flash reading on the composite purchasing managers index (which covers both industry and services) for the 16 nation euro area rising to 44.4, fractionally above the 44 registered in May. So we are just where we were before, contracting more slowly than in Q1, but still contracting, and the fiscal bullet is now almost spent.

Not without importance was that the reading came in significantly weaker than the consensus expectation for a sharp increase to 45.3. So the market *has* been getting ahead of itself.



On the face of it, the index is now consistent with a quarterly drop in GDP of around 0.5 percent, well below the 2.5 percent fall registered in the first quarter. However - as Capital Economic's Ben May notes - "the index has recently been a poor predictor of growth and the hard data have painted a less upbeat picture."

The situation was broadly as expected on the manufacturing front - with a rise to 42.4 from 40.7, but this is still quite a strong contraction. On the one hand the improvement in the factory index is pretty generalized and so, with the new orders-stock ratio rising further, there should be further improvement in the coming months. On the other, given that this upward trend in the factory index is mostly inventory-driven, caution needs to be exercised in extrapolating the tendency to the whole economy.



Ben May also points out that the drop in the services PMI from 44.8 to 44.5 suggests that fiscal and monetary stimulus measures "are yet to have a significant impact on domestic demand." Maybe we could rephrase that slightly, their bolt seems to have been shot without result, and the fiscal element, at least in Germany, Spain and Italy will now increasingly have a constraining impact.




German Contraction Worsens

More worryingly, the rate of contraction in Germany's private sector accelerated slightly this month, with flash estimate of the Markit composite PMI falling to 43.4 from the seven-month high of 44.0 in May.The flash estimate for the manufacturing PMI index rose to 40.5 from 39.6 in May, but the flash services PMI reading fell to 44.3 from 45.2 last month. And in the manufacturing sector the ratio of new orders to stocks of finished goods fell back to 1.12 after rising to 1.18 in May. Which effectively means inventories started to rise again.






French Economy On The Mend

On the other hand, conditions in the French improved for the fourth straight month in June, helped by much slower falls in the level of new orders. The flash estimate for the Markit/CDAF PMI rose to 47.7 in June compared with 46.6 in May.

The key to the improvement - according to Markit - was a sharp jump in the composite new orders index, which hit 48.3 compared to May's reading of 45.3, suggesting that demand in the euro zone's second largest economy is steadily on the mend. "The composite new orders index is getting close to stabilisation. We're still very much on course for a strong easing and it does suggest that by the end of the year we could be seeing growth again in France," according to Chris Williamson, chief economist at Markit.

The June manufacturing PMI rose to 45.5 from 43.3, the slowest pace of contraction in activity since August last year. However, Markit cautioned against taking an overly optimistic view of the data, stressing that conditions in the French economy remain fragile, and recovery is likely to be unstable.


Just how fragile was emphasised by the fact that the services sector PMI slipped back to 47.5 from 48.3 in May, following three consecutive monthly increases.



And just to underline the fragility part, we learnt today that spending by French consumers on manufactured goods fell in May, led by a sharp drop in purchases of clothing and household goods, according to the statistics office INSEE today (Tuesday). Consumer spending fell 0.2 percent month-on-month in May, well below a consensus forecast for a rise of 0.2 percent. Total consumption in May was down 1.6 percent compared to May 2008.

That having been said, I have no doubt, and unequivocally, to say that as far as I am concerned France is the strongest (or least weak) economy among the EU big five (France, Germany, the UK, Italy and Spain) at the moment.

Consumer Sentiment Also Stable In June

GfK AG’s forward looking German consumer sentiment index for July increased to 2.9 from a revised 2.6 in June. But sentiment is still on a very low level, and in general the story is the same as the IFO one yesterday, it's all about expectations. But are these expectations well founded?



With all the talk in the press and by politicians that the economic downturn may be coming to an end, consumer hopes of economic stabilization are intensifying and accordingly, economic expectations are increasing moderately. The fact that the employment market has remained fairly robust is likely to be one reason for this. Reports that the inflation rate stood at 0% in May are having a positive effect on income expectations and the propensity to buy.

Economic expectations increased for the third month in a row. The increase of 5.7 points is even more pronounced than in the two preceding months. The indicator currently stands at -22.6 points.


Economic pessimism is declining somewhat and consumers seem to be expecting that the steep economic decline can gradually be halted. Certainly, this increase in the indicator has been supported by the fact that the expected slump on the unemployment market has so far not materialized, and has been deferred by improved short-time working regulations. However, the indicator is still far too low to warrant talk of an incipient recovery from the perspective of consumers.





Following the slight drop last month, income expectations have once again recorded increases in June. The indicator has climbed 6 points to stand at -3.3, which is the highest value since April last year. The decrease in inflation and the prospects for pensioners of a significant boost to their received pension payments as of July 1, 2009 are certainly the important factors buoying up income expectations at present. These factors are counteracting creeping redundancy fears and have held at bay the negative effects on the indicator up to now. However, it is to be expected that the forecasted deterioration on the jobs market will increase these unemployment fears, and will place a great amount of strain on income expectations.


The propensity to buy not only retained its current level in June, but even improved slightly. Following an increase of 2 points this month, the indicator now stands at 14.5 points, which means that there has even been a considerable improvement of 38 points in comparison with the prior year. According to GfK the large decrease in inflation is currently stimulating the propensity to consume. Falling prices, for example as a result of the scrappage bonus, act as incentives to buy. Other industries are also implementing this type of price reduction, in order to encourage consumers to make further purchases.

German Business Confidence Up (Slightly)

German business confidence rose for the third month in a row in June. The Ifo institute in Munich reported that its business climate index, based on a survey of 7,000 executives, increased to 85.9 from 84.3 in May. The index reached a 26-year low of 82.2 in March. As far as I can see, this isn't exactly a whole big deal. Just more of the same for now.



In terms of areas of activity, retail sales show no improvement, construction is up slightly, and manufacturing keeps hovering near the bottom.



Ifo’s measure of expectations increased to 89.5 from 86 while a gauge of current conditions eased to 82.4 from 82.5. It is obvious that the current situation in June is no better than March - in fact the conditions are still the worst to date, and all the work is being done by "expectations". It would be really, really interesting to understand just what is driving those expectations.

Facebook Links

Quietly clicking my way through Bloomberg last Sunday afternoon, I came across this:

Facebook Members Register Names at 550 a Second

Facebook Inc., the world’s largest social-networking site, said members registered new user names at a rate of more than 550 a second after the company offered people the chance to claim a personalized Web address.

Facebook started accepted registrations at midnight New York time on a first-come, first-served basis. Within the first seven minutes, 345,000 people had claimed user names, said Larry Yu, a spokesman for Palo Alto, California-based Facebook. Within 15 minutes, 500,000 users had grabbed a name.

Mein Gott, I thought to myself, if 550 people a second are doing something, they can't all be wrong. So I immediately signed up. Actually, this isn't my first experience with social networking since I did try Orkut out some years back, but somehow I didn't quite get the point. Either I was missing something, or Orkut was. Now I think I've finally got it. Perhaps the technology has improved, or perhaps I have. As I said in one of my first postings:

Ok. This is just what I've always wanted really. A quick'n dirty personal blog. Here we go. Boy am I going to enjoy this.

Daniel Dresner once broke bloggers down into two groups, the "thinkers" and the "linkers". I probably would be immodest enough to suggest that most of my material falls into the first category (my postings are lo-o-o-ng, horribly long), but since I don't really fit any mould, and I am hard to typecast, I also have that hidden "linker" part, struggling within and desperate to come out. Which is why Facebook is just great.

In addition, on blogs like this I can probably only manage to post something worthwhile perhaps once or twice a month, and there is news everyday.

So, if you want some of that up to the minute "breaking" stuff, and are willing to submit yourself to a good dose of link spam, why not come on in and subscribe to my new state-of-the-art blog? You can either send me a friend request via FB, or mail me direct (you can find the mail on my Roubini Global page). Let's all go and take a long hard look at the future, you never know, it might just work.

Everything In Germany Is Going Up....

Everything in Germany is going up, except it seems the real economy - and except of course prices, which were stationary in May (that is a change of 0% year on year - the lowest inflation rate for over 20 years). Anyway, today it was the turn of investor confidence to put in another good reading. In fact German investor confidence rose to what is effectively a three-year high in June. Aparently investors feel the recession in Europe’s largest economy is bottoming out.

The ZEW Center for European Economic Research said its index of investor and analyst expectations increased to 44.8 from 31.1 in May - the highest reading since May 2006.



Unfortunately, there is little real evidence to support this highly optimistic view of the future.

Green Shoots In Germany and Estonia?

Well, I am busying myself this morning scratching around looking for green shoots in Turkey. But even as I was digging for these I couldn't help notice this coming in over the radar from Germany, courtesy of Bloomberg:

German exports fell more than economists forecast in April as the global crisis restrained demand, keeping Europe’s largest economy mired in a recession. Sales abroad, adjusted for working days and seasonal changes, fell 4.8 percent from March, when they rose a revised 0.3 percent, the Federal Statistics Office in Wiesbaden said today. Economists expected a 0.1 percent decline in April, according to the median of 10 estimates in a Bloomberg News survey.

So German exports have not touched bottom yet - they are still falling. Since the German economy is export dependent, then this implies the obvious, the German economy is still contracting. I don't think anyone ever doubted this, but looking at the way some of the material has been presented recently, it wasn't always clear.



Indeed year on year, exports fell by 22.9%, the fastest rate so far, although since these annual stats are not working day corrected I wouldn't read too much into that just yet, since you really do need to average across March and April due to the Easter impact.


Another country where rather unsurprisingly we aren't seeing too many green shoots at the moment is Estonia, and only today the statistics office reported that exports decreased by 38% and imports by 41% (year on year) in April.





As a result the Estonian trade deficit rose for the second month running, and hit 1.8 billion kroons. So what we are seeing here is a distinct move in the wrong direction, on both counts.



We also learnt from the Estonian stats office today that GDP contracted by 15.1% (year on year) in the first three months of this year - a figure which was revised down from the earlier flash estimate of 15.6%.




Compared to the 4th quarter of last year, seasonally and working-day adjusted GDP decreased by 6.1% (more on all this in another post).




Finally on the green shoots front for today, we could note that Hungary's industrial production plummeted in April by 25.3% (year on year) according to working day adjusted data released by the stats office. This compares with a year on year contraction of 19.6% in March.



Month on month there was seasonally and working day adjusted drop of 5.1% in April, following 4.5% growth in March. So again, output is still falling, and no bottom has been reached.



This latest Hungarian data is particularly unpalatable following a number of reports which had been left open the possibility that the downturn in the Hungarian economy had ground to a halt, or at least staretd to decelerate. If industrial output shows similar weakness in other East European countries then this does not augur well for future German and eurozone output, since Hungary plays a significant role in the early stages of the European manufacturing production chain.