More Evidence of an Intensifying Economic Downturn in Euroland

November 24, 2008

Late last week came news of a 3.9-point decline in Euroland’s November composite PMI to record low of 39.7 and an even worse reading of 36.2 in manufacturing versus 54.1 in November 2007. Word also surfaced that construction output sank 1.3% in September.

Four more adverse statistics were reported from the common currency area today.

  1. New industrial orders fell 3.9% in September, led by drops of 5.1% in base metals and 3.8% in transportation equipment. Orders dropped by 7.4% at a seasonally adjusted annual rate in the third quarter following decreases of 5.6% saar in 2Q08 and 3.0% in 1Q08.
  2. The German business climate index, compiled by the IFO Institute, declined three times greater than expected to 85.8 in November from 90.2 in October. The IFO index was last as low as 85.8 in February 1993 when the key central bank interest rate was at 8.75%. The 88.0 average reading in October-November was down from quarterly averages of 95.0 in 3Q08, 102.3 in 2Q and 104.0 in 1Q.
  3. Euroland’s current account deficit doubled to EUR 10.6 bn in September. There was a deficit of EUR 33.2 bn in the twelve months to September, EUR 82.3 bn worse than in the previous twelve months. Merchandise trade was responsible for two-thirds of that deterioration, and net investment income accounted for the rest of the slide.
  4. Belgium, which is a good bellwether of euro area trends because of its heavy trade dependency, reported a sharp drop in business sentiment to a 15+ year low of -23.7 in November from -14.8 in October and -5.9 in August. The factory component of the index slumped to -27.1 from -14.9 in October and minus 5.6 three months ago. Belgian consumer confidence also sank to a 15-year low.

ECB officials have telegraphed a readiness to reduce interest rates by another 50 basis points on December 4th. Cuts of that amount were made in both October and November. The market hopes to see the ECB ease more sharply in December, but officials have not encouraged such speculation. Disappointing investors is a good technique for undercutting the euro, which remains 11.3% above its lifetime average value of $1.1531. On the other hand, the severity of the recession in Euroland is greater than ECB officials anticipated, and a rate cut of 75 basis points could be defended by this underutilization of resources and by rapidly falling commodity prices, each of which points to lower medium-term inflation than officials had assumed. The ECB will be releasing new quarterly growth and price forecasts. The last projections, released on September 4th when oil cost $107.89 per barrel, still put 2009 growth in the black at 0.6-1.8% and penciled in CPI inflation next year of 2.3-2.9%. November inflation due later than week is likely to be at or below the floor of that range.

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