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Tuesday, June 23, 2009

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.


Anonymous said...

I see today from Japan(bloomberg,23 June) that for the first time since january there exports to other asia nations(China)have accererated in decline.
I also saw you mention somthing about this in a previous post..about China running out of steam as far as there stimulus goes.
there is a very good chance that this is the tip of the iceberg thats headed straight for the titanic.(equity markets)

I´m going to join facebook somtime this week..I´ll see you there for futher discussions. The equity markets have given the recession the ¨V¨ shape to recovery(some 30% retracement since March),
Because of that I believe there will be another extreme correction(downside) coming...probably..starting in Septiember..possibly August..

Edward Hugh said...

"I´m going to join facebook somtime this week..I´ll see you there for futher discussions."

Great, I'll look forward to it. I had already (eg) posted on the Japan exports story.

Anonymous said...

In the U.S. it appears what I feared. Consumers are not spending, rather the opposite it,saving it seems. Unheard of really for the U.S. and it must make china nervous..as well as Germany. U.S. Confidence surged to a high which makes sense to me since after tax cuts on income and S.S s well as stimulus checks who would´t feel better?
The surprise is that spending did not ¨surge¨ like the equity markets had anticipated.
So, like you mentioned, the fiscal bullets are spent or in the late stages of being spent in the U.S.. Fctor in Gas prices at the level of 2.70- 3.00 and I do not see any ¨surge¨ at all in consumer spending. Its a proven fact that consumers retrench at those levels.
When do you think Germany´s stimulus will run out? It seems the stimulus had the positive effect of both consumer and business confidence improving.
How much longer do you think this could continue? 3 months or maybe 4?
Since most G8 countries have declared ¨no new stimulus´s needed¨..
What could happen once it becomes apparent economic conditions may very well retreat after the stimulus´s(China, U.S. Germany) have abated?
Finally, it looks like Germany and the Eurozone may get a big surprise when disinflation turns into what Japan has now which is full blown deflation.

Anonymous said...

According to Bloomberg reporting, 7 July, German exports in May surged more then 8% for the month of May with domestic demand also increasing some 4%.
That is good news to say the least and it looks like I was wrong to say that export demand would not pick up. Especially since the euro is so strong. Green shoots indeed for May.
This also explains some of the confidence readings that have come in so positive.
Jury is still out however on whether this ¨surge¨in exports will actually have legs.

Edward Hugh said...

Hello again Anonymous,

Those are not exports, but export orders which have risen. This is positive, but not THAT positive, since orders have been at a very low level, as people have been consuming out of stocks.

Don't abandon your position so easily. There is a lot of slack left in this rope yet awhile, but the victim will hang.