Euroland Economy Poor But Better
July 30, 2009
Real GDP in the euro area contracted at the horrific rates of 4.5% in 2008 including 6.9% at an annualized rate (saar) in the final quarter. The downturn intensified with a drop of 9.7% saar in the first quarter of this year. Second-quarter figures get released two weeks from tomorrow on August 13th. Three sets of recently released indicators suggest that GDP fell sharply but probably by less than half as much as in the first quarter. Positive growth may resume in the present quarter but it will be very low and remain so for the foreseeable future. It would take a very low rate of potential GDP growth to prevent slack in the economy from climbing. Price risks would therefore seem to be less balanced than ECB officials maintain verbally.
Composite PMI released July 24 by the Markit Group: At 46.8 in July, such was 2.2 points above June’s reading, 3.6 points higher than the average score in 2Q09, 9.2 points greater than the 1Q average, and 10.6 points above the monthly cyclical low this past February. Still, the reading remains below 50, which divides contraction from expansion. At the February low, manufacturing (33.5) was significantly below the services component (39.2), which comprises the larger share of the economy. Five months later in July, manufacturing (46.0) and services (45.6) had converged. Progress in correcting excessive inventories has alleviated some of the pain in manufacturing, but a worsening labor market hangs over services.
Retail PMI scores released today by Bloomberg: Upward spikes in June in France and Italy were significantly pared in July, which caused the overall reading for the euro area to stall. At 47.3, such was below the second-quarter mean score and still entrenched below 50. Euroland’s low-water mark of 40.6 was reached last November. July values are compared to prior quarterly averages in the matrix below:
| July | 2Q09 | 1Q09 | 4Q09 | |
| Euro area | 47.3 | 47.7 | 43.5 | 42.1 |
| Germany | 49.8 | 47.1 | 43.8 | 43.4 |
| France | 46.0 | 47.6 | 46.3 | 48.2 |
| Italy | 45.6 | 48.2 | 39.6 | 31.7 |
Euroland Sentiment Index released today by the European Commission: July’s Ezone overall sentiment reading of 76.0 in July was 11.3 points higher than the recent low of 64.6 in March but still 24 points below the average level of this data series since 1990. Sentiment improved in each of the last four reported months including by 2.8 points in July, but the index is only back near its 4Q08 mean reading of 75.6. The average scores in 1Q09 and 2Q09 were 65.7 and 70.2. Construction sector sentiment of minus 33 is only a single point above its recent low. The rise of consumer confidence from a cyclical low of minus 34 to negative 23 exceeds the comparable improvement of industrial confidence from a trough of -38 to minus 30 in July.
ECB officials play down the importance of negative on-year inflation, claiming that such will be a temporary development and therefore not something to which policy would have to respond further. Nonetheless, negative 12-month inflation reported this week of 0.6% in Germany, 1.4% in Spain, and 1.7% in Belgium surpassed private estimates and may have also surprised ECB analysts. Bank loans to the private sector are just 1.5% higher than a year ago, which is a record low. Lending to non-financial companies of 2.8% in the year to June is half of April’s 5.3% and way down from an increase of 15.0% in the year to May 2008. It would take an unmistakable setback in Euroland’s exit from recession for ECB officials to cut interest rates or do more quantitative easing than planned. ECB officials talk tough about guarding against future inflation. They always have and always will. But actual policy is more pragmatic and situational. Overnight rates are very similar to U.S. levels, one-month rates are only 22 basis points higher, and the euro has met repeated difficulty appreciating past $1.40. Still, policymakers would likely need evidence of declining expected inflation to ease policy significantly further. Whenever inflation or growth has tracked lower than the Bank’s forecast, officials have defended the appropriateness of their stance by countering that expected inflation remains anchored at a pace consistent with the target of below but close to 2%.
Copyright Larry Greenberg 2009. All rights reserved. No secondary distribution without express permission.
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