4th September 2012
The Purchasing Managers Index (PMI) figures for August indicated manufacturing output fell again both in Britain and the Eurozone. However, the numbers all showed improvement from July with the UK hitting a four-month high of 49.5 over the month (below 50 represents a contraction).
Against a backdrop of cooling economic growth in China and persistent fears over the future of the single currency in Europe, some commentators have seen the latest PMIs as a sign that sentiment may be turning. Simon Ward, chief economist at Henderson Global Investors, wrote on his blog:
"Available August PMI results have been mixed but, on balance, no worse than expected. The UK orders index rebounded sharply and Euroland edged higher, while China and Japan weakened modestly further. The G7 aggregate may be at or near a bottom. It leads output by a month or two, so this would be consistent with the "monetarist" prediction that global momentum will bottom in October / November and revive into 2013."
Slowing rates of contraction across the developed world may be a positive for those looking for signs of a nascent recovery – but if they do represent improvement then it is a modest one. That the figures are "no worse than expected" is perhaps more suggestive of how negative broader sentiment has become than indicative of an inflection point. Finding good news out of falling output is always likely to be a challenge.
The difficulty for the optimists is that for a sustained recovery to set in the central drivers of uncertainty would have had to be removed. Yet with signs that economic weakness in the Eurozone has begun spreading from the periphery to the core, there is little hope of an imminent solution.
Mario Draghi, president of the European Central Bank (ECB), passed up his invitation to the Jackson Hole summit in order to continue negotiations ahead of what is being described as a critical policy meeting on Thursday. While the decision was no doubt intended to demonstrate his commitment to finding a solution to the region's woes, for many it simply highlighted how parlous the situation has become.
Faced with German refusals to consider extending the ECB's remit to allow it begin a bond purchase programme, the prospect of a rescue package for struggling member states appears remote. Moreover, the various pressures being put on Draghi have convinced many that even if there is a policy announcement he will not be afforded the necessary freedom to carry it out to full effect.
Under these circumstances a small uptick in sentiment may reflect a sense that Eurozone leaders are focusing on moderating the pace of decline, but are unlikely or unwilling to reach a wholesale solution.
"I suppose it's less bad than last time but I don't see a reason why this pick-up in sentiment will last," says Michael Taylor, director at Lombard Street Research. "A little bounce, such as this, should not be overestimated. Where's the driver of a sustained upswing going to come from?"
Springing the lobster trap
A few weeks back an article in the Spanish daily El País likened the structure of Eurozone to "a lobster trap: easy to get in, but very difficult to get out". Of course, during the boom years this "no exit" clause was seen as a key strength – a demonstration of the commitment that the union had to each member state and vice versa.
As the article suggests, however, when firms saw the likelihood of a euro break-up increasing it turned from a benefit to a burden. This was at least in part due to the fact that the clause had rendered any plan for exit redundant. As a consequence not only were there no plans for dealing with the inevitable complexities of withdrawing from a monetary union, there was not even a conception of them.
Policymakers in the region have only added to the confusion. At a press conference in Berlin last month German Chancellor Angela Merkel reiterated her support for Greece stressing she wanted it to "remain part of the eurozone". Yet on the same day Volker Kauder, the leader of her parliamentary group, told reporters that a Greek exit "would be no problem for the euro".
Such conflicting messages help explain the bunker mentality of corporates on the Continent. They are being forced to adjust to a potential new reality as they are being assured that the new reality will never come to pass.
Though an exit from the single currency would be painful for struggling states, it may eventually become preferable to a nihilistic commitment to austerity without a Europe-wide plan for recovery. Under present policy this point is creeping ever closer.
There have been many possible solutions proposed to its current woes – including those suggested by the New Economists and Yanis Varoufakis – but so far little has changed. Hopes are slim that the ECB meeting on Thursday will produce a major policy change and unless the pessimists are proven wrong we may yet be some way from bottom.
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