Europe's Economic Contraction Intensifies in February

Hopes that Europe's battered economies might be about to turn themselves around took another sharp knock today (Friday), as the preliminary flash reading on the purchasing manager survey signaled that activity in both the manufacturing and the services sectors are contracting at a new record pace in February.

The preliminary Markit euro-zone manufacturing purchasing managers index, or PMI, fell to a record low of 33.6 in February from 34.4 in January, while the services PMI also fell to a record low, dropping to 38.9 from 42.2 in January. As a consequence the euro-zone composite PMI reading dropped to its own record low of 36.2 from 38.3 in January. Any reading below 50 on these indexes indicates month-on-month contraction.

click to enlarge

Barring some spectacular (and entirely improbable) turnaround in March, it now seems likely that the Q1 GDP contraction will be worse than the Q4 2008 one. If we consider that the eurozone contracted by 0.2% in Q3 2008, and by 1.5% in Q4, then, in my humble opinion, the data we are seeing for this quarter is entirely consistent with a 2% quarterly contraction (or an annualized 8% rate of contraction). Not quite Japan territory yet, but not far behind. And for those who simply don't believe the PMIs can tell you so much, here is Markit's own chart, showing the strong underlying relationship between movements in GDP and the *flash* composite PMI. Pretty impressive I would say.

Germany's Contraction Intensifies

The German service PMI came in at at 41.6, showing the fifth consecutive month of contraction. This was a sharp drop from last month's 45.2 reading and means that the recession is now following through from manufacturing to services. The difficult conditions have led service business owners to hold their grimmest outlook in the last decade, that is since the index was started. More ominously, the recent data points to a strong reduction in the employment level.

On the other hand, February saw the tiniest of upticks in the manufacturing sector, since the PMI came in at 32.2, from January's 32. The best that can be said here is that the rate of contraction may have stabilized.

France Holds Up Slightly Better Than Most

In France, the manufacturing sector (see chart below) gave up on most of January's rebound, and the PMI fell to 35.4 from 37.9 in January, while services (see chart above) slipped to a record low of 40.1 from 42.6 in January. Nonetheless, France is visibly performing considerably better than Germany, and when all this is over, we will have plenty of time to hold the debate as to why that has been.

Comments

[sleepless_o...:]

Edward Hugh - - -

Thanks for this excellent review, complete with thorough data. One item you did not mention: I have read that European super banks may have more problems than in the U.S. because they are, in many cases, much larger compared to GDP levels in their parent countries. This diminishes the amount of help (other than nationalization) that can be provided through fiscal policy. Even in the case of nationalization, how effectively can liabilities several times GDP be dealt with?

Again, thnaks for this excellent article.

Feb 20 09:10 AM

[Jan Baker:]

Yes, thanks. I can't wait for the analysis of France's better performance than Germany's. One can't help but thnk that France's 'internal market' is better because their birth rate is up.

I wish Mr. Hugh would answer this question: what would happen to the US economy, theoretically, if our birth rate climbed and settled in at, say, three offspring per couple? (It is presently, last time I checked, at 2.1, down from a previous period of 2.3, which was, at the time, the highest of industrialized nations, and the reason why Europe counted on us to consume their exports, since their own internal markets are crushed by lifestyle issues. If Madame chairman has her way, it will continue to drop as the stimulus package deliberately funds more abortion and birth control.)

Or what would it do for Europe if their birth rate suddenly took off?

Feb 21 08:39 AM