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.

European Depression Grinds On

From the latest Market Manufacturing Report:

The Markit Eurozone PMI® Composite Output Index rose from 47.7 in May to 48.9 in June, according to the flash estimate, indicating the smallest downturn in business activity since March last year.

The sub-50 reading nevertheless rounded off another weak quarter. At 47.8, the average reading for the three months to June is only marginally higher than the 47.7 average recorded in the first three months of the year, suggesting that the eurozone’s recession will have dragged into a seventh successive quarter.
 
Although activity continued to decline overall, the third consecutive monthly rise in the PMI in June indicated that the rate of contraction is on a moderating trend. Manufacturing output fell in June at the slowest rate in the current 16-month sequence, registering only a very modest decline, and services business activity showed the joint-weakest fall since March 2012.
 
Adding to the picture of the downturn moderating, new business fell at the slowest rate for five months, the rate of decline having eased for the third month in a row. New orders in manufacturing fell only marginally, registering the smallest decline for two years, while the services sector saw the smallest fall for five months.

Expect a fair amount of hype about the slowing trend in the downturn, along with a special emphasis on the possibility of the EU coming out of the depression in the second half of 2013.  Don't believe the hype.  First, this is the sixth quarter of negative growth.  We're now entering the possibility that a continued slow pace of expansion is the new norm.  The region is not only still experimenting with the incredibly backward idea of austerity but their export markets are growing modestly at best.  And the political leadership has absolutely no foresight.

  

EU Depression Marches Onward

The unemployment rate continues to move higher.

Manufacturing numbers continue to print in negative numbers, although the trend is lessening

• Final Eurozone Manufacturing PMI at 48.3 in May (flash: 47.8)
• Downturns ease in all nations covered
• Price deflationary pressures remain, as input costs and output prices fall further

Here's a chart of the data:

Everybody's still below 50.

The EU: Continent Wide Zombie Like Economy

I wrote this story last weekend. Since then, Markit and the ECB have released additional information to that provided in this post.  However, nothing released has changed the overall tenor of the economic situation.





The EU is another zombie economy -- an economy that is shrinking in a continent wide slowdown. Let's start by looking at the GDP data:

The chart above is from the latest EU GDP report.  Consider the following data points:

1.) The EU 17 has been contracting for three straight quarters.
2.) The EU 27 has bee contracting for two straight quarters.

In other words, the entire continent can be described as in a recession according to one of the standard definitions of recession (two straight quarters of contraction).

Also note the following.

1.) Three countries have been contracting for two straight quarters: Belgium, Denmark and Finland

2.) Four countries have been contracting for three quarters: Czech Republic, Spain, UK and Hungary

3.) Six countries have been contracting for at least four quarters: Italy, Greece, Cyprus, Portugal, Netherlands and Slovenia.

That means that of 27 countries in the EU 27, a little under half are in a technical recession.

When we look at the contributions from household spending and investment to EU growth, we see that household spending contracted in 6 of the last 8 quarters for the EU17 and 27 and only barely grew for the EU 27 in the 3Q12.  Total investment has contracted for four straight quarters as well.  In short, two key components of GDP have shown no meaningful growth in a year.

The above is from the ECB's latest chart pack and shows that the only GDP element keeping the region out of trouble is net exports.  


Unemployment is moving higher:

 

Consider the following points from the latest Markit survey of the EU region:

The headline index has now remained below the neutral 50.0 mark for ten consecutive months and, although the latest reading was the highest since
July, it was nonetheless indicative of a solid contraction in overall private sector output. The average reading so far in Q4 is the weakest since the second quarter of 2009.  Downturns continued in both the manufacturing and service sectors in November. However, rates of contraction slowed to seven- and three-month lows respectively. Both sectors were affected by weak demand from domestic and export markets.

Here is the accompanying chart:

For most of the last year, we can see that the PMI has been below 50.  This has corresponded to a very weak reading from industrial production and corresponding industrial production readings:

 The left chart above shows that industrial production growth has been negative or just barely growing for most IP sectors over the last year.  The key element of the chart on the right is that incredibly sharp drop in industrial confidence (the dotted red line), which is now dropping at levels last seen in the great recession.

And the above chart shows that retail sales have been contracting for over a year and a half.  As a result, consumer confidence has been dropping for the same time as has retail confidence.

Like the Japanese and UK economies presented earlier this week, the EU economy is in terrible shape.  It's in a continent wide recession; retail sales as is industrial production.  

A Statistical Look At Europe

Click on all images for a larger image.

The following charts and graphs are from Eurostat:


The percentage change from previous quarters and the same quarter a year ago are all decreasing. Decreasing GDP means


Increasing unemployment, which leads to
Decreasing retail sales, which leads to

Declining industrial production.

And -- this scenario is leading to possible deflation. In the chart below I have blocked off the countries that look to be moving toward deflation: