Tuesday, August 6, 2013

Market/Economic Analysis: Is the EU Recession Ending?

I've been very bearish on the EU for the last 6-12 months.  However, recent reports indicate the EU's recession may be ending.  Let's take a look at the data.

From Markit:

The seasonally adjusted Markit Eurozone Manufacturing PMI® rose to a two-year high of 50.3 in July, up from 48.8 in June and above the neutral 50.0 mark for the first time since July 2011. The PMI was also above the earlier flash estimate of 50.1.


Eurozone manufacturing production rose for the first time since February 2012, underpinned by the first growth in new order volumes for over two years. New export orders also posted a slight increase following June’s marginal decline.

Here's a chart of the data:

Note that with the exception of Greece (the brown line), all the other PMUs are near 50 and in an uptrend.  Note especially the sharp upturn in Italy (the red line) and Spain (the light Green line).  Here are the one month readings:

Ireland   51.0   5-month high
Netherlands   50.8   24-month high
Germany 50.7   (flash 50.3)   18-month high
Italy   50.4   26-month high
Spain   49.8   2-month low
France   49.7   (flash 49.8)   17-month high
Austria   49.1   8-month high
Greece   47.0   43-month high

Two of the larger countries appear to be stabilizing.  From Markit's Spain report:

Business conditions in the Spanish manufacturing sector remained broadly stable in July, as had been the case in June. Output fell slightly over the month, while a marginal rise in new orders was recorded. Meanwhile, lower metals prices led to a further decline in input costs.

The seasonally adjusted Markit Purchasing Managers’ Index® (PMI®) – a composite indicator designed to measure the performance of the manufacturing economy – dipped back below the 50.0 no-change mark in July, posting 49.8 from 50.0 in June. That said, the index leading still signalled a general stabilisation of business conditions in the sector.

Overall, the Spanish economy appears to be healing, although the expected recovery will be weak:

The Spanish economy may finally be about to turn the corner, with official estimates showing that gross domestic product fell by just 0.1 per cent in the second quarter – the slowest rate of decline in almost two years.


“The recession is over but the crisis continues,” said Edward Hugh, a Barcelona-based economist and blogger. “Spain’s deep-seated problems are not going to go away because you have a few decimal percentage points of growth,” he added.
Italy also appears to be on the mend:

At 50.4 in July, the seasonally adjusted Markit/ADACI Italy Manufacturing Purchasing Managers’ Index® (PMI®) signalled an improvement in the overall health of the Italian manufacturing sector at the start of the third quarter. Up from 49.1 in June, the headline index was at its highest level since May 2011, boosted by growth in output and new orders, and also slower declines in both employment and stocks of purchases. Firms meanwhile benefitted from a further, albeit slower, decrease in input costs, with output prices also falling at a moderated pace on the month.

And France -- another economy that I've been bearish on -- appears to be at least stabilizing:

The headline Purchasing Managers’ Index® (PMI®) – a seasonally adjusted index designed to measure the performance of the manufacturing economy – posted 49.7 in July, up from 48.4 in June. The latest reading signalled only a marginal deterioration in overall business conditions in the French manufacturing sector.

Although July’s increase in production was modest, it was nevertheless the sharpest in just over two years. Growth of output was broad-based across the consumer, intermediate and investment goods sectors.

Also of importance is the EU unemployment rate remained stable in its latest reading, which the rate for the EU 27 declined:

All of these readings involve one month worth of data, so it's important to take it with a grain of salt.  However, also note the data involves manufacturing, which strongly correlates to overall economic growth and unemployment, which is a lagging indicator.