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.