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Thursday, August 22, 2013

Eurozone private sector growth beats expectations, but hides divergence

This morning saw the release of the latest set of Markit Purchasing Managers’ Index (PMI) - a set of indicators used to measure the economic health of the manufacturing and service sectors. The figures for the eurozone as a whole once again beat expectations.
Eurozone Composite PMI (Aug A) M/M 51.7 vs. Exp. 50.9 (Prev. 50.5)
Eurozone Services PMI (Aug A) M/M 51.0 vs. Exp. 50.2 (Prev. 49.8)
Eurozone Manufacturing PMI (Aug A) M/M 51.3 vs. Exp. 50.8 (Prev. 50.3)

German Flash Composite PMI (Aug A) M/M 53.4 (Prev. 52.8)
German Services PMI (Aug) M/M 52.4 vs. Exp. 51.8 (Prev. 51.3)
German Flash Manufacturing PMI (Aug A) M/M 52.0 vs. Exp. 51.2 (Prev. 50.7)

French Composite PMI (Aug) M/M 47.9 (Prev. 49.1)
French Services PMI (Aug) M/M 47.7 vs. Exp. 49.2 (Prev. 48.6)
French Manufacturing PMI (Aug P) M/M 49.7 vs. Exp. 50.2 (Prev. 49.7)
We covered this issue in detail last month and, needless to say, our thoughts haven’t changed much in such a short space of time, but there are a couple of points to note.
  • Again, this is another small positive piece of data for the eurozone, in particular the eurozone services PMI is at its highest point for 2 years while the manufacturing at its highest since June 2011.
  • That said, the on-going problem of divergence (which we have discussed before) continues to loom large. As Germany continues to post strong economic data, France looks to be showing signs of struggling, despite its unexpectedly positive GDP growth in the second quarter of this year. This divergence has the potential to become a serious problem for both the ECB (in terms of trying to balance its monetary policy) but also for the Franco-German axis which has long been at the core of the eurozone and vital to its stability.
  • This turnaround in economic data for the eurozone has unfortunately coincided with problems/issues elsewhere in the global economy. The Chinese economy (a big source of trade for the eurozone) has shown signs of stumbling, while the US Fed is toying with the prospect of tightening its monetary policy - this could impact global liquidity and sentiment with suitably negative knock-on effects for the eurozone. With Germany leading the way as an export orientated country and many in the periphery  looking to copy this (through choice or Troika programme), the eurozone continues to be reliant on external demand.
  • The combination of positive economic data and long term forecasts of loose ECB policy are helping boost sentiment in the eurozone more broadly. However, some significant questions are looming, notably how to fund the likes of Greece, Portugal and Ireland as their bailout funding winds down over the next year. These issues have so far been pushed into the long grass but the time is quickly approaching where answers are needed, unfortunately indicators here are much less positive than the PMIs. More ad-hoc structures seem to be the likely outcome.


Rik said...

1. Good to see that at least Germany works as a normal economy. Growth potential of 2-3% with a Government and a private sector not massively overborrowing to get there (like the US).
Sign that if you have your house in order even with an export oriented economy things work more or less as normal.

2. Looks like the link/correlation between confidence indexes and PMIs and that kind of stuff vs GDP is still there.
I got the idea earlier, may be because of the duration of this crisis that people had adjusted their norm. Probably/hopefully only a temporary slip.

3. France is back to the french normal (aka in deep manure). Was hard to place the 2.0% GDP growth last Q. Still looks pretty unrealistic to me (if it is too good to be true it probably is not true) but if there was something it probably was only a one Q event.

4. Stats from countries like Spain look to become a problem. GDP figures and as a consequence (negative) growth simply look way to positive. The longer the crisis lasts in that sort of countries the more problematic it will be to keep these skeletons in the closets. With as a consequence that if the economy starts to run again you need may be a not accounted for 10-20% GDP to compensate first. Next to all the crap that is not yet written off by their banks, but should have been.
They are still going South and with a considerable pace and the bottom for anybody with a brain is not in sight. With bad loans and misrepresented GDP to be compensated, when they are finally there, makes likely Japan look like Norway.
5. Rest of EZ positive again is hard to grasp. The whole South deep South and also Holland and Finland the largest non-Germany Northern country below zero leaves very makes you wonder were the positives come from.
Has to be Italy or Spain much less negative than anybody with a brain would presume. Or with dodgy figures to postpone austerity and other measures. Thing to watch.

jon livesey said...

If you look at the French economy in detail, there are some very bad trends. For example, French exports are barely at 2008 levels, while UK exports have grown by 25%. UK exports are now around E53bn a year versus E36bn for France.

Now, if you are a mercantilist, you can retort that both countries are running a trade deficit, so the UK isn't really doing any better, but it's worth thinking that through in more detail.

If the UK's exports have risen by 25% in volume terms, that translates into rising employment in export-oriented industries, and sure enough, UK unemployment is around 7.8% and France's is three whole percentage points higher, at 10.8% and rising.

Meanwhile the UK imports E54bn a month and France E40bn. And the OECD average annual wage is $38k for France versus $44k for the UK.

To me, this illustrates the main weakness of mercantilism. mercantilism concentrates on trade balance and ignores what lies behind it.

In France, low exports translate into high unemployment, and thus low domestic demand and so low import demand, while the UK is the other way round; high export levels keep employment and domestic high and draw in higher levels of imports.

So two countries with similar trade deficits end up with very different levels of employment and domestic consumption.

But the punter likes his one size fits all number, so the trade balance as the measure of national virility is likely to be with us for some time.

Rik said...

There are also a lot of other major differences (and nearly all in favour of the UK):
1. UK banking sector looks much healthier than that of France. UK has cleaned up a lot more mess than France.
2. UK has effectively no housing bubble left with the air waiting to get out. In France housing is probably still 30-50% overpriced.
Just imagine what will happen to personal wealth there if the bubble bursts. No way you get consumption (main GDP driver) going when half the families or more have to take a 100K Euro hit. And with worldwide interestrates rising and a bankingsector in bad shape for France that is a very realistic scenario.
3. Consumers do not really believe the present system is sustainable in France and so does business. Anyway it is much worse than in the UK. As a consequence spending and investing is at a low and likely to remain there for some time. With no structural measures taken.
4. Investors especially the international ones have no confidence in Hollande. Cameron is at least 2 leagues higher in comparison.
5. French system is static because of the large government. Dips hit in relatively late and they are usually one of the last ones to get out.

Next to having an own central bank and the Euro crisis which gives a lot of downside risk for france.

Trade balance is and will remain an important indicator. Nearly all European countries in problems had a deficit. The EMs in the most trouble India and Brasil similar. Next group Turkey and Indonesia are in much greater trouble than its peers with a surplus.
Japan now gets under pressure as it starts to run a deficit. Etc etc.
It is not the only thing but an important one. With the US in a different position and the UK likely to get away with more in that respect than the rest (excl US).

Camelot said...


"Germany works as a normal economy" ...

Really? Germany works as the dominant member of a currency union within which they utilise mercantilist policies to further their own economy by standing on the necks of their comembers.
Let's see how wonderful Germany looks with a Deutsch Mark... and Italy with a Lira...

Anonymous said...

German household energy users pay a higher rate for energy than German industry. Householders are therefore subsidising German industry which, to me, seems like an unfair advantage. Add this to their artificially low exchange rate (via the Euro) and German efficiency doesn't look so efficient.

Germany ran a trade surplus equivalent to 6% of GDP in 2008 and it is still at this level in Q3 2013. How will other Mananazone countries rebalance their trade and/or compete fairly when they cannot devalue (due to having the Euro) and Germany refuses to help by rebalancing too?

What Germany hasn't realised yet is, that one way or the other, they will end up paying to fix it either through deep haircuts to ECB Euro sovereign bond holdings, direct bailouts or mass migration from basket case Euro nations.

The whole Euro project is just not sustainable.

Welcome to the Mananazone where every day since 2008 has been a Groundhog day.

Democracy, self rule and self determination is the only way the UK can survive. UK out.


Jesper said...

Apologies for going off topic but this might be of interest:

It is an analysis of a proposed free trade agreement involving the US, except for some interesting parallells with the EU it does not directly concern the EU.

A quote from it:
"Indeed, nations that join must conform their laws and rules to TPP's strictures, effectively supplanting US sovereignty and cancelling our people's right to be self-governing. Worse, it creates virtually permanent corporate rule over us--there's no expiration date on the agreement, and no provision in it can be altered unless all countries agree. Thus, even if Americans voted in an election to make changes, any other TPP country could overrule us by not agreeing."

Anyone find it similar to the current form of the EU?

Rik said...

At the end of the day Germany is the only larger EZ country that has a properly functioning economy. No debt to plug the holes (like eg the UK and nearly everybody else); no exceptional debtlevels; no housing bubble like Belgium and France, competitive in the worldeconomy, etc.

The co-members knew while they joined what they would join. A German type currency. With all its pros but also its cons. The South and France have profitted from the pros (mainly low inflation and low interest rates but did not adjust their operational modus for the cons. At the end of the day there is still no cure for stupidity.
Anyway Germany could very likely survive a revaluation of its currency being it Euro or something else. And again as one of the few (with the other FANGs.
The rest cannot, will likely not even survive a devaluation (which is more likely to happen anyway). Imports are simply essential and difficult to reduce and there is a huge trade deficit and little undercapacity in the sector that exports, that could effectively be used. First years it will be a disaster (basically what Spain/Greece show now).

Rollo said...

Our trade deficit remains a serious problem. We are a world class exporting nation. We need to export to the real world without expensive chains holding us to the sinking ship of Europe. We can then in time reverse our decline.

Rik said...

Basically the only thing that works for something like a freetrade agreement. It has to be clear when and how countries can leave it. Plus all parties should agree to later changes made (or have agreed a system for that).
It is totally 'unnatural' if parties to an agreement could change part of that agreement unilaterally. Agreements do not work that way.

The problem with the EU (and this kind of rules is) when they donot have a proper platform with those who it concerns. Like the EU for many things.
But the only workable solution is countries not signing up to things (again like has happened for the UK re the EU) when there is no platform and it could be considered of importance for large groups.

It is not much different from any other agreement. You cannot unilaterally increase your wages or increase the rent of a house. What you can do is reneg of get out of the agreement altogether. Works the same for international agreements.

In the EU the problem is that on important daily affairs rules are agreed upon which are not even have a majority in several countries pro. While seen the complications to change the rules or even more to get out again there should have been an even larger platform. Combined with the fact that the EU legislation has silently moved further and further into the daily domain of people and the fact that a country can in a lot of cases be overruled (and have to follow rules that even its national politicians donot want, not even to mention its population. The latter as the political elite is often considerably more pro-EU than the locals.

For the UK the problem as said earlier is that respective governments have been signing up to things as if it were Christmascards.
Next to the fact the approval should be done at the highest level to give max safeguards. Government can however often do that without even consulting parliament.

As I mentioned a few times earlier the UK should imho not move further into the thing, seen the reneg pending. And if still it has to do it via a seperate agreement/treeaty not via the the EU framewotk.
Within that framework getting out of a seperate part can only be done via a full EU exit. Which makes things totally inflexible.
For long term commitments flexibility like in the financial world is a highly valuable option.