German Services PMI August 2008

The pace of decline in eurozone service activity eased back slightly in August from July’s five-year record low. The final Markit Eurozone Services Business Activity Index came in slightly above the flash estimate of 48.2, registering 48.5 (from 48.3 in July). So eurozone services were declining more slowly, but this was, nevertheless, the third consecutive monthly fall in services activity.

Germany was the only big-four euro nation to see an expansion in the services sector in August, although even in Germany the growth rate eased back for the third time in four months and registered a seven-month low. Spain continued to record the weakest performance of the big-four, but the pace of contraction eased for the second month running from June's series record. Both France and, in particular, Italy also saw moderations in the rate of decline of their services sectors after record contractions in July.

The pace of decline of new business in Spain remained by far the steepest of the big-four euro area nations, despite moderating from record rates in recent months. The rate of contraction of new business in Italy also slowed from July's record decline while, in France, the rate was broadly unchanged from the previous two months.



Spain


Spain's services sector contracted in August as weak demand eroded new orders, activity and employment, but the rate of decline slowed slightly from July, the Purchasing Managers Index showed on Wednesday.

The Markit Research Services PMI index crept back to 39.0 from 37.1 in July, still well below the 50 divide between growth and contraction but less weak than the consensus forecast of 37.



The PMI survey, covering service companies from banks to cafes, showed activity shrinking at a rate that was only slightly slower than the record contraction in June. The worst fall was among companies providing financial and housing-related services, which have been starved of new business as Spanish house sales fall and the global credit crunch keeps lending costs high.

Confidence about business in 12 months' time turned marginally positive from a negative reading in July, but it was still the third weakest reading since the series began in 1999, and 20 percent of the companies reported staff cuts in August.

Germany


The German service sector weakened less in August than initially thought,  the service sector eased to 51.4 in August from 53.1 in July, showing growth slowing less sharply than the earlier flash estimate of 50.6. 



Hotels and restaurants also reported a difficult month as consumers, paying much more this year to cover basic food and energy costs, sought to economise. Businesses grew increasingly worried about market conditions over the next 12 months, pushing August's gauge of business expectations down to 42.8 -- the lowest reading since November 2002 -- from 43.1 in July. They became much more reluctant to recruit staff, with the jobs index at 50.4 showing new hiring offset by job shedding.

Italy

Italy's service sector shrank for the ninth month running in August, order levels continued to fall and companies faced persistent cost pressures. However, at 48.5 the Markit/ADACI purchasing managers' index beat economists' expectations given the extent of its rebound from an all-time low for the decade-old series at 45.6 in July, and companies showed some optimism that business would pick up in the medium term.

Despite the broadly gloomy picture, the business expectations sub-index rebounded from July's all-time low of 58.9 to 66.5. Although still below the long-run average of 74.2, this showed a significant upturn in optimism, particularly in the hotel and restaurant and financial services sectors.





France

The French PMI recovered but by less than expected, rising to 48.0 in August from 47.5 a month earlier. The previously released flash estimate had shown it rising to 48.5.

Germany's Manufacturing PMI Shows Contraction In August

Confirming the general weakness in Eurozone manufacturing activity, the Purchasing Managers' Index, or PMI for the sector stood below the neutral level for the third straight month in August. Markit Economic's manufacturing PMI for August came in at 47.6, slightly higher than the original lash estimate of 47.5. This was the third successive month in which the PMI remained below the make or break 50 level which marks the difference between an increase and a decrease in production, new orders and employment. The index was below the 50-mark all the big-four Eurozone nations.

Almost all of the national manufacturing sectors surveyed reported lower production, with Germany recording a drop in output for the first time since August 2005, thus ending a thirty-five month period of continuous expansion that has been the most sustained in the entire German survey history.



The contraction of French manufacturing sector gathered pace, with the manufacturing PMI dropping to the weakest since January 2002, the Markit/CDAF survey showed. The indicator now stands at 45.8, down from July's 47.1. The initial estimate was 45.1 for August.

The Markit/ADACI survey showed that the Italian manufacturing PMI climbed to 47.1 in August from 45.3 in July. The Italian manufacturers experienced tough operating conditions as output and new orders declined in August.

The Spanish manufacturing PMI, reported the third lowest level in the ten-year survey history. The index stood at 42.4 in August, up from 39.2 in July, the survey conducted by Markit Economics revealed.

Among others, the Manufacturing PMI for the Netherlands improved in August, although it remained below the boom-or-bust level, results of a survey by Markit Economics showed. The Dutch NEVI/DPA Purchasing Managers' index increased to 49.8 in August from 48 in July, mainly due to an increase in production levels and a slower rate of decline in new orders. Ireland's NCB Manufacturing PMI rose to 44.9 in August from July's record low.

Have German Retail Sales Now Passed Their "Peak"?

Sharp Drop In June Sales

Retail sales in Germany, Europe's largest economy, fell a second month in July as rising prices and a slowing economy acted as a brake on household spending.

Price and seasonally adjusted retail sales were down by 1.5 percent in July over June, when they fell by 1.4 percent, according to the latest data from the Federal Statistics Office. On a year on year basis there was no change over July 2007.



Now the ongoing lacklustre performance of German domestic consumption during what has been an unprecedented economic expansion in recent terms is causing a lot of heart-searching at the moment, but what many observers seem to fail to be taking note of is that German retail sales have been dropping steadily for time now, at least as measured by the seasonally adjusted constant price index.



More importantly - as will be argued in this (and other accompanying) posts - there are serious theoretical grounds (in the context of Germany's ageing population problem) for postulating that Germany's retail sales may NEVER rebound again on more than a conjunctural basis, that is we may see local "peaks" and "troughs" but the secular decline may now not reverse. This is a point which most of consensus analysts who look to a cyclically driven "rebound" in domestic consumption appear to fail to take into account.

But before going further with this point, let's take a look at some more data.

Slight Improvement In The Rate Of Contraction In The August PMI

The latest Bloomberg eurozone Purchasing Managers' Index, based on a mid-month survey of economic conditions in the euro area retail sector, pointed to a continuing contraction in retail sales across the eurozone for the third consecutive month in August. While the PMI rose to a three-month high of 47.7 it remains below the crucial 50.0 zero growth mark.


There was some, however, some variance in retail sales trends across the three largest euro area economies. Italian sales continued to fall, extending the current period of month on month consecutive declines to a year-and-a-half. However we did hit a nine month "high" with sales contracting at the slowest pace since last November, rising to 44.8 (or minus 5.2) from 38.2 (or minus 11.8). Thus August revealed a significant eeasing in the rate of contraction (a finding which is completely in harmony with the rather better consumer confidence index reading for August. Indeed the fall in Italian retail sales in August was not as strong as the one in Germany, where the rate of decline - 44.1 - accelerated to its strongest pace so far this year.





So things in Italy are bad, and they are getting worse, but they are now getting worse more slowly than they were. The fact that in August oil prices were significantly down from the July peak obviously has something to do with this situation.

The August PMI data also revealed a rather higher level of pessimism amongst retailers with regard to September sales, with the index for the sales outlook registering 48.0, down from 49.5. The data revealed some variance across countries, while French and Italian retailers expect sales to come in below target next month, which reflects underlying concerns that the economic downturn will continue, German retailers were more positive, forecasting a stronger than previously expected performance.


At the same time GfK AG's consumer sentiment reading slumped to its lowest level in five years. GfK AG's index for September, based on a survey of about 2,000 people, fell to 1.5, the lowest since June 2003, from a revised 1.9 in August, the Nuremberg-based market-research company said in a statement today.



"Peak" Retail Sales

German retail sales appear, according to the Federal Statistic Office annual index, to have "peaked" in 2006 (see chart below, where the 2008 value is my own estimate based on the first half performance, and the not unreasonable assumption that the second half - given the generally weaker economic outlook - will be no better than the first half.



Now there are complicating factors here, since there was the notorious 3% VAT hike in January 2007, which obviously did constitute quite a price shock, and will have affected the level of sale, so I may be a bit quick off the mark in calling this the ultimate "peak", but before I go into this a bit more, let's explore the background argument a little.








So the question we are faced with now, is whether or not we are faced with a "peak" retail sales phenomenon? The theoretical basis for this assumption is on reasonably solid ground, and there is evidence to show the phenomenon exists in other ageing economies (Germany, Hungary, possibly Japan). In the Italian case, I have constructed my own makeshift index, and the performance of this index since 2003 can be seen below. It seems Italian retail sales may have "peaked" in early 2003, and since that time the decline has been continuous, although sales did stabilise during 2005 and 2006 (I will come to this point later).




Germany's population is now in fact contracting. According to the Federal Statistics Office German population "peaked" in 2002, at 82,537,000, and since that point it has been declining steadily.



Germany's population is also ageing, and we know from basic life cycle theory (Modigliani) that saving and spending patterns change across the life cycle, with the propensity to borrow against future income in order to buy now declining significantly among the over 50s, and since it is increasing consumer credit that drives retail sales growth in the dyamic internal consumption economies, then it is highly likely that ageing will now act as a drag on sales growth in countries like Italy with very high median population ages (43, along with Italy and Japan). As we can see in the chart below (which comes from the US Census Bureau database), Germany's median population age has been rising steadily, and at a very rapid rate (over 1 year's increase in median population age for each calendar year, of course historically this type of rapid ageing is quite unprecedented), with the only real substantial unknowns between now and 2020 being life expectancy, which may accelerate more than anticipated (in which case the population ageing will be even more rapid), and immigration, which will slow ageing down a bit.





Peak Construction Activity?