This morning has brought another economic worry for the Euro area and the ECB. We had started 2024 with ECB President Christine Lagarde pointing to signs that the economy was picking up. This was followed by 0.3% GDP growth in the first quarter and probably something similar in the second. But towards the end of the latter quarter the PMI numbers she uses as a leading indicator weakened and this morning we have been told this.
Eurozone economic recovery fades further in July
That will have led to a few groans in the ECB tower in Frankfurt when it arrived.
The seasonally adjusted HCOB Flash Eurozone Composite PMI Output Index, based on approximately 85% of usual survey responses and compiled by S&P Global, fell to 50.1 in July from 50.9 in June, posting only fractionally above the no-change mark and thus pointing to a near-stagnation of private sector activity.
No-one with any sense thinks that the PMI is accurate to 0.1 so what we have here is unchanged or if you prefer flatlining. The second message if we take the June and July readings together is a rather concerning rate of decline compared to the above 52 reading in May.
What is behind this?
Demand seems to have just drifted away.
The near-stagnation of business activity reflected further signs of weakness in demand. New orders decreased for the second month running in July. The pace of reduction quickened slightly from that seen in June, but remained only modest nonetheless.
There seems to be an issue with exports which makes me think of the problems with China. Not only the recent trade dispute but also the Chinese economic weakness that led to an interest-rate cut earlier this week.
New export orders (which include intra-eurozone trade) fell more quickly than total new business as firms in the eurozone continued to struggle to secure sales from international clients. New export orders decreased for the twenty-ninth successive month, and at a solid pace that was fractionally quicker than that registered in the previous survey period.
Also there is a continuation in the gap between services and manufacturing.
The eurozone manufacturing sector was again a key source of weakness. Production was down markedly in July, and to the largest extent in the year-to-date. As such, a rise in services activity stopped the overall private sector from falling into contraction. That said, the expansion in the service sector was only modest and the weakest since March.
The decline of manufacturing in the Euro area is something that has been entirely predictable when you look at its energy policies. No matter how often officials claim that leads to cheaper energy the movement of business to places where it is less expensive tells the true story. In fact Eurostat has given some hints his morning via the annual summary for 2023.
On the other hand, the highest decrease in sold production value was recorded in the manufacturing of chemicals (€542 billion to €461 billion), with a 15% drop, followed by the manufacturing of basic metals and fabricated metal products (€888 billion to €816 billion) with 8%
Germany
There is a particular sub-plot here where what was considered to be one of the strengths of the Euro area is being hit hard.
This looks like a serious problem. Germany’s economy fell back into contraction territory, dragged down by a steep and dramatic fall in manufacturing output. The hope that this sector could benefit from a better global economic climate is vanishing into thin air. With the composite PMI now below 50, our GDP Nowcast predicts that economic output will shrink by 0.4% in the third quarter compared to the second quarter ( HCOB)
Should this turn out to be so then it is a 0.1% decline for Euro area GDP in isolation. But more than that the previous leader of the pack for the Euro area economy has this going on.
Factory output levels fell sharply and at the quickest rate for nine months (index at 42.2),
These are the sort of readings we saw in the Greek decline a bit over a decade ago and leaves policy in rather a mess. After all the official numbers for May were already quite poor.
-2.5% compared to the previous month (seasonally and calendar adjusted)
-6.7% compared to the same month last year (calendar adjusted)
If we look for other signals of the economy the Federal Statistics Office has been trialing truck mileage.
-0.1% compared to the previous month (calendar and seasonally adjusted)
-0.8% compared to the same month last year (calendar adjusted)
As you can see the numbers for June also suggest a weakening of the economy.
The ECB
An interview with Vice-President de Guindos was published yesterday by Europa Press.
However, there was some worsening in the data for economic growth, owing mainly to the political uncertainty following the European and French elections.
As you can see he too is worried about the economy although it is a curious explanation to blame elections as Germany has not had one. I think that the next bit was more revealing though as he guided towards another interest-rate cut in September.
Data-wise, September is a much more convenient month for taking decisions than July was.
As to the next bit he is probably hoping that readers are not aware that the June rate cut came accompanied by higher inflation forecasts.
But most of all, we will have new macroeconomic projections in September, and it will be crucial to see in those projections that inflation is steadily converging towards 2% over the medium term.
There was also a speech from ECB Chief Economist Lane and whilst the published remarks were neutral the scenario for the wage tracker showed around a 2% decline in wage rises for next year.
x.com/heimbergecon/status/1815667114432225690
Along the way it is hard not to have a good laugh at this or for some cry. Here is how Phillip Lane covers the biggest forecasting failure in ECB history.
The combination of methodological developments and the increased availability of granular data is facilitating much richer analysis and more informative quantitative estimation of the impact of various types of shocks and, crucially, the impact of various types of policy measures.[2] In particular, it is increasingly feasible to move beyond representative-agent, representative-product macroeconomic models by incorporating various types of heterogeneity.
Orwell nailed it pretty well.
Comment
The weaker trend for the Euro area economy poses several issues. We can start with my Monday post about Euro area fiscal problems. Lack of growth makes them worse in every respect as deficits and debts rise and are compared to weaker growth figures. There is also the underlying trend of economic growth being weak. Things for the Euro area are starting to look rather Italian as in the “Girlfriend in a coma” theme. That is something of an irony as Italy is presently doing relatively better.
As a big athletics fan I am looking forwards to the Paris Olympics ( hopes are high for those who have trained at Battersea Park). It looks to be the factor that has transformed a poor French PMI into this.
The French economy is projected to grow by 0.3 % in the third quarter, according to our HCOB GDP Nowcast, due to the service sector expansion being signalled by the HCOB Flash PMIs.
Although the Euros football did not seem to do a lot for Germany and there is also this.
The number of unwanted Paris Olympics tickets available for resale has hit more than a quarter of a million, as lack of demand increases concerns days before Friday’s opening ceremony that athletes will compete against a backdrop of empty seats. via @FT
The ECB may already be regretting it did not cut interest-rates last week. That will be reinforced if the Bank of Canada cuts later today.