Economic decline in France and Germany is not the type of convergence the Euro wants or needs!

As I enter my fourth year of blogging and indeed return to Mindful Money as it is back I find myself returning to a subject which has cropped up again and again over that period. This is the Euro area and the economic crisis that is affecting it. If we step back in time we can see discussions of a two-speed Euro area which morphed into a three-speed area. However we are seeing more and more evidence of a slowdown in “area one” or what is commonly called the core Euro nations. For example it was only on the 15th of this month I found myself discussing the Netherlands whose poor third quarter growth figures meant that her economy had shrunk by 1.6% in the previous year. So ironically we could be heading back to a two-speed Euro area which might seem good in terms of economic divergence but if it is due to the core nations slowing is in fact bad. Convergence in decline is not quite what the founding fathers of the Euro had in mind I suspect!


There is no nation more central to the Euro project than the latter-day economic locomotive which is the German economy. She is supposed to be the star around which the planets of the Euro system revolve. But even this star is showing signs of running short of fuel or “Running on Empty” as Jackson Browne put it.  Yes she managed to report economic growth of 0.2% in the third quarter but business surveys are increasingly showing that even she looks likely to move into contraction.

Today’s Markit purchasing managers survey tells us this.

November data indicated that the combined output of the German private sector dropped at a broadly similar pace to that seen in the previous month…… The seasonally adjusted Markit Flash Germany Composite Output Index registered 47.9 in November, only fractionally higher than October’s 47.7 and below the neutral 50.0 value for the seventh successive month

If we look into the detail there was a relative recovery in manufacturing but German services fell back to levels of contraction last seen in the summer of 2009. Indeed not only did business levels fall but as you can see below this is expected to continue.

Shrinking new business volumes in the service sector contributed to a steep drop in expectations for activity over the next 12 months

Also whilst there was an improvement in exports to outside the Euro area take a look at this for the manufacturing sector.

Stocks of purchases across the manufacturing sector, which can be a useful barometer of confidence in the demand outlook, dropped at the steepest pace for three years – despite a slower fall in new work.

So the star around which the Euro area revolves is showing signs of dimming.


This has already been not the best of week’s for La Republique with the Moodys downgrade. Although the effect has been more perceived that real as the CAC 40 equity index has rallied all week and is now at 3492 and whilst her ten-year bond yield is up to 2.18% that has hardly put it in the stratosphere! Also if we look for international comparisons UK Gilt yields have risen by a similar amount. So actually you could argue that the real impact is that we have yet more evidence of the waning power of ratings agencies rather than a kick in the teeth for France.

However if we move to the real economy we see a different story. France did manage to report 0.2% economic growth in the third quarter although this did come at the cost of revising down the second quarter slightly. But the business surveys show signs of trouble ahead.

French private sector output contracted at a slower pace in November. ……..Flash France Composite Output Index climbs to 44.6 (43.5 in October),

So whilst the first part of the quote looks hopeful we see that both October and November show sharp contractions in France’s economic activity. A consequence of this is shown below.

Job shedding in the French private sector persisted in November. Employment was down for the ninth month in succession


So we see that the star of the Euro area is in danger of an economic contraction in the fourth quarter of 2012 and I am reminded that stars can give life but in their red giant or white dwarf variants can also be very destructive. A little caution is required as the dip of 2009 was over exagerrated by the business surveys compared to the official numbers but the immediate future looks like stagnation at best.

The outlook for France looks worse as back in 2009 the business surveys matched her  official performance much more accurately. Indeed the accuracy was very impressive. Should that accuracy be in the process of being repeated then she has a serious problem ahead. Looking back on that basis then her economy should have shrunk and not grown in the third quarter of 2012 and so if she continues on such a path then a fall in the fourth quarter like the one that the Netherlands has just suffered (-1.1%) is not only possible it is probable.

At this point I should say that business surveys are by no means perfect. The recent experience in Ireland where they misfired has led me to demote them from the upper echelons of the Premiership to mid-table mediocrity but that is still better than many official numbers. Also as I have pointed out above they have performed well in France up to now.

The Euro area

We also have numbers today for the Euro area as a whole and after the French and German numbers above they will be approached with a little trepidation.

Markit Eurozone PMI Composite Output was little-changed in November according to the flash estimate, up fractionally from 45.7 in October to 45.8.

Some algorithms may have traded on the reports of a two-month high unless of course they have a function for spurious accuracy! And the reported state of the Euro area economy gets rammed home here.

for the fourth quarter of 2012 so far, PMI data suggest the strongest contraction of output since the second quarter of 2009.

 As to the future well it apparently looks none too bright.

The plight of the service sector was also highlighted by companies’ expectations for activity in the year ahead dropping to the lowest since March 2009.

And in manufacturing.

The amount of goods purchased for use in production fell steeply, causing stocks of purchases to contract at the same pace as the near-three year record seen in October.


So we see that overall the pattern up to mid/late November is that the Euro area will show a sharp drop in GDP in the last quarter of 2012. We still have December to go but it will have to show quite a recovery to offset this. This may even come with a contraction in Germany and a sharp fall in France. I am reminded by all the references to 2009 shown above of my theme that 2012 is on the way to being the new 2009

Some caution is required as the business surveys predicted a sharper fall than the 0.1% drop in economic output in the last quarter in the Euro area. But if you keep faith in them as a reasonably accurate predictor then there is the implication that the fourth quarter will show some catch-up. So early in 2013 when the numbers are released we seem likely to be in for another “surprise”.

Is the UK a good European?

I do not want to get into the European budget debate except to point out that it looks like the Mad Hatters Tea Party to me! As the UK is presented as making itself unpopular let me point something out which should mean that we are popular.

Our trade in goods with the 27 nations of the European Union

2009 -£37.9 billion

2010 -£44.1 billion

2011 -£43.3 billion

Looked at like that then as the rock group Queen put it we should be receiving this message.

You’re my best friend

On a completely different subject let me wish a Happy Thanksgiving to those who are celebrating it today.

This entry was posted in Euro zone Crisis, Eurozone, GDP, General Economics, Stagflation and tagged , . Bookmark the permalink.
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  • Anonymous

    I understand the rating agencies are being challenged in Oz over mortgage backed securities they touted as AAA?
    Attempts by UK to hold the line against EU budget increases are the real test of influence in Europe surely?

    Musical reference – Cameron as Chris Isaak’s Lonely with a Broken Heart

  • DaveS

    Those trade in goods numbers are shocking – I think it just emphasises how dependent we are on services exports – just how unbalanced the UK economy is towards services even compared with the rest of Europe.

    This is all the more shocking when you consider we were the birth place of the industrial revolution and an industrial powerhouse up until the 60′s. Its mostly been thrown away by successive failed governments largely made up of lawyers, bankers and PPE graduates.

    If big investment banks start to move business away from London we are in big trouble (rumour is UBS is largely shutting up shop here and others to follow)

  • James

    Welcome back to the old site (until you go back again?)…
    Mad hatters’ tea party is too good for the EU summit.
    Quite apart from the trade numbers above, which demonstrate absolutely clearly why the EU would NOT renege on free trade agreements if we left the EU (rather demolishing the, in any case fictional, 3 million job losses that would accompany our departure).
    The other number that should be borne in mind, as it never seems to dawn on other European leaders when castigating the UK, is that (see today’s Times for full figures), the UK even after the rebate contributes more than France, Italy etc and is not far behind Germany. The UK pays more per head than Germany.
    The comedy on Radio 4 this morning betwen a Pole (Poland gets £11 billion net a year) and a Brit (net payment over £7 billion) just showed how polarised the discussion is and is just a horse trade to see who can get someone else to pay for their spending.

  • Rods

    Hi Shaun,

    Where do we all meet for your blog tomorrow? :-)

    So the real question now is: How long and how deep will the EU recession be?

    With the Eurozone M3 money dropping slightly in September, I await the October figures with interest to see if that was the start of a trend.

    I think France’s new Government have done much economic damage, to a weak economy already in trouble, in a short period of time. The Government are now trying to row back to the shore, having seen the storm on the horizon, but I think it will engulf them before they get there!

    What is happening in the budget negotiations is not the UK against the rest, as at least 8 EU countries are prepared to veto the current proposals. Many countries that are grappling with austerity, won’t and in some cases can’t afford a 6.3% real term increase in the EU budget!

    Shaun, when we finally leave the EU then our new relationship will be defined by Article 50 of the Libon treaty, which formalizes in law the procedures for an exiting country. The EU have to negotiate a free trade agreement or EEA membership, if the UK so desires. It is a question of when as the creation of the FSE as part of a fiscal union is incompatible, with the majority of UK populations desire to be a free democratic country with directly elected politicians. We want to be part of a single market not part of the FSE

    My record of the day is “Lets face the music” by Nat King Cole as “I think there maybe trouble ahead” in all these areas.

  • Scooby

    Hello Shaun,

    Great analysis as always. Your comment regarding 2012 being the new 2009. Take a look at the HARPEX charts. If it follows the PMI lead, do you think it is possible we could see the figures for the new year close to the 2009 all time series low? I place more importance on the HARPEX over the BDI as it suffers less supply side issues.

  • Forbin

    Hello DaveS

    If remember my history right the Landed Gentry of the Victorian Age despised the up coming new money class of the Industrialists.

    The current crop of wealthy still do !

    See now the ruling class compare JCB with RBS . yet alone Dyson …..


    PS : declining oil now the City , well I suspected the City was going to move anyway , the pivot of wealth is moving eastwards and theres nothing we can do .

  • Mac

    “I think France’s new Government have done much economic damage, to a weak economy already in trouble, in a short period of time. The Government are now trying to row back to the shore, having seen the storm on the horizon, but I think it will engulf them before they get there!”

    Yep, they are just about to blow a diminishing and fragile housing market right out of the window with new taxes.

  • DaveS

    Yes,we are still a class-ridden society that has an unfortunate public school bias towards the gentlemanly professions and a preference to invest its capital in land/property rather than industry. We never had a proper revolution – at least not yet !

    I fear our EU partners are just itching for revenge on our City casino – won’t be long before big European banks “decide” to relocate their investment banking activities – at least the ones that weren’t already burnt beyond recognition in the crash.

    Seems like the US has already declared war on the City & UK banks for different reasons – partly because we helped undermine the Glass Steagall act by allowing US banks to do their dodgy dealing from London back in the 80′s and 90s. Of course they didn’t try to stop it and instead just repealed the act.

  • pavlaki

    This link confirms what I have observed in Greece :

    and similar comments apply to Ireland and Spain) – prices are not coming down, internal devaluation is not working. Salaries are falling but shop prices and restaurant prices are still very high.

  • ExpatInBG

    Hi Shaun,

    Greece and others are locked into an inappropriate Euro-wide exchange rate. As a historical simile, on Black Monday Norman Lamont decided the fixed rate ERM needed to be abandoned. This lead to a UK recovery that may give us hints as to how quickly Greece might recover after re-adopting the Drachma.

  • Shaun Richards

    Hi Chris
    There is also the possibility that “Owner of a Broken Heart” by Yes might turn out to be appropriate.
    I didnt know about the Australian news which I can only welcome and hope that it leads to genuine reform.

  • Shaun Richards

    Hi James
    Having only just returned I can confirm that I have no plans to move for the forseeable future! Your point about the polarised debate just reminds us one more time that for all the Federal efforts or Federalisation dreams neither the EU nor the Euro area remotely resembles a country.

  • Shaun Richards

    Hi Rods
    I do like the idea of a type of blogging Flashmob! Flashblogging may give the wrong idea though! For example I could turn up on the Bank of England website and decide it needs to be set to music.
    For example the QE explanation could be read to the sound of “It’s a Mistake” by Men at Work.
    The Inflation report: “Fantasy” by Earth Wind and Fire.
    However, tomorrow will be a case of same time same place.

  • Shaun Richards

    Hi Scooby

    Thanks for the mention of the HARPEX index which I have taken a look at. It has been quite a plummet since June of this year and from a peak which was way below the previous….
    As to your question then there will be downwards pressure from Europe but the real issue is the Chinese recovery as in will there be one? Any flickers could make the HARPEX bounce so I tend to agree that early 2013 could be very difficult for it unless as they put it in the film 2001 “Something Wonderful” happens.

  • Shaun Richards

    Hi Expat

    I remember it well on a day when two base rate rises were announced but only one ever happened as by the next day we were out of the ERM! And whilst there are claims of a choice there was some much selling of £ the truth is that we were ejected as the Bank of England was losing its foreign currency reserves fast.

    It was quite a day!

  • Shaun Richards

    Hi pavlaki
    Is there any questioning of the inflation numbers in these countries? This concept is fresh in my mind as I have been putting proposals into the UK RPI consultation.
    Also some of the higher prices is due to the way that sales taxes aka VAT keeps being raised.

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