Euroland’s Recovery Not Fading Away

March 29, 2010

The oft-repeated view of the ECB Governing Council is that a recovery from a severe economic contraction remains “on track” but that such will be “moderate,” “uneven,” and “uncertain.”  Those adjectives imply an upturn that 1) will be weaker than the growth of aggregate supply, 2) will not shared by every EMU country or equally by those members that are expanding, and 3) could fizzle in the face of downside risks that rear their ugly heads.

Economic data released during March paint a similar picture.  Here are some highlights of those figures.

  • The March flash composite PMI for the euro area printed at 55.5, up from 54.2 in December, 51.1 last September and 38.3 a year ago.  Figures above 50, as with other diffusion indices, imply expanding activity.  An average score of 54.3 this quarter is generally consistent with economic growth of around 2.0% annualized, which would be considerably better than growth in the final quarter of 2009 and even above the 3Q09 pace.
  • Real GDP only climbed 0.5% annualized in 4Q09, which was much weaker than U.S. growth of 5.6% last quarter.  All the growth in the quarter stemmed from net exports.  Public-sector spending and personal consumption were generally unchanged, while business spending fell.   In on-year terms, that is compared to the final quarter of 2008, real GDP was down 2.1%, a contrast with the 0.1% uptick of U.S. GDP, with drops of 3.1% in Spain, 3.0% in Italy, 2.5% in Greece, 2.4% in Germany and 2.2% in the Netherlands outweighing smaller decreases of 0.8% in trade-reliant Belgium or 0.3% in France.
  • Industrial production increased by a much larger-than-anticipated 1.7% in January and was 2.5% greater than the 4Q09 average level.  Industrial output had increased at annualized rates of 3.0% in the third quarter of 2009 and 7.9% in the fourth quarter.
  • Employment slid just 0.2% last quarter, less than drops of 0.5% in 2Q09 and 3Q09, and such recorded an on-year drop of 2.0%, only half as much as a 4.0% decline in U.S. jobs between 4Q08 and 4Q09.
  • Exports in January were 4.5% greater than a year earlier, a turnaround from an 18.1% decline in calendar 2009.
  • Industrial orders printed a disappointing 2.1% decline in January.  That figure needs to be taken in the context of the wintry season and previous annualized advances of 34% in 3Q09 and 4.6% in 4Q09.  Orders in January were still 7.0% larger than a year earlier.
  • Overall economic sentiment in March reported today scored a better-than-expected 97.7 versus 94.1 three months earlier in December and readings of 86.7 in September and 70.6 in March 2009.  A parallel business climate index printed at minus 0.32, best since a month before Lehman Brothers failed and up from -0.96 in December, minus 1.91 last September and -3.48 a year ago.  In the three months between December and March, industrial sentiment rose by six points, retail sentiment increased four points, services firmed three points, and lowly construction also improved three points.  Consumer confidence has stalled since October but is 17 points above its March 2009 reading.
  • Retail sales continue to trend downward.  Volumes in January were 0.2% lower than their 4Q09 mean level and 1.3% less than in January 2009.
  • Construction output is another stressed sector.  January’s level was 1.4% below the 4Q09 mean and 12.5% under its year-earlier reading.  Construction had tumbled at an 8.5% annualized pace in the final quarter of 2009 in spite of a very accommodative ECB policy stance.

Euroland inflation is back in the black but only half as much as in the United States.  The two economies have similar unemployment rates below but close to 10%.  Euroland runs a trivial current account imbalance, which masks sizable surpluses in Germany and Holland and big deficits in Italy, Spain, Greece and Ireland.  The collective budget deficit of the common currency area is around 7%, which though smaller than the U.S. imbalance, lies well above the medium-term goal of no greater than 3.0% for every member of the union.  Moreover, Euroland has higher debt-to-GDP ratios than America.

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary distribution without express permission.



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