An Abrupt Cool-Down in the Euro Area’s Economy

July 21, 2011

The table below compares purchasing managers’ survey readings in July to quarterly average readings going back to the final quarter of last years.  Participants in each monthly survey are asked to report if conditions have improved, held steady or deteriorated since the prior survey, and the numbers are compiled in such a way that a score of 50 indicates that flat growth in activity.  The further above 50, the faster is the rate of improvement, and vice versa. 

Three overall summary statistics are given, one for manufacturing, one for services and one for a composite of both types of businesses.  The composite score of 50.8 in July was the lowest reading since August 2009.  The summary readings for manufacturing of 50.4 and services of 51.4 were at their weakest levels since September 2009.  All three readings were above 50, so conditions were still improving but at the pace of a crawl.  The averages for the second quarter were not much lower than in 1Q, suggesting only slightly weaker growth then than the 3.4% annualized GDP rise registered for the first quarter.  However, July’s figures point to little growth at the start of the third quarter and the possibility of negative growth for the entire 3Q period if momentum continues to ebb at the alarming recent rate.

PMI July 2Q11 1Q11 4Q10
Total 50.8 55.6 57.6 55.4
Mfg 50.4 54.9 57.9 55.7
Services 51.4 55.4 56.6 55.0

The patterns above occurred in both core members of the monetary union like Germany and France and the smaller peripheral nations that had been experiencing less dynamic activity even in the first half of this year.  The ECB will not react to this data series per se.  For one thing, one month’s data do not constitute a trend.  For another, central bankers will want to see this piece of timely survey evidence confirmed in other survey statistical releases and, more importantly, in hard evidence of actual production and demand.  Considering that these reports also highlighted easier inflation and that the data show not a few member economies struggling but rather the entire area losing momentum rapidly with its 331 million people, the report hints at the possibility that the ECB may end up slowing down or pausing the pace of its gradual tightening.  Stay tuned.

Copyright 2011, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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