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Wednesday, February 22, 2012 8:33 AM


Eurozone PMI "Worse Than Expected" and Back in Contraction; Expect German-Periphery Divergence to Resolve to the Downside for Germany


Bloomberg reports Stocks Decline in Europe After Worse-Than-Expected PMI Data

Purchasing Managers Index

European (SXXP) services and manufacturing output unexpectedly shrank in February as the euro-area economy struggled to rebound from a contraction in the fourth quarter. A euro-area composite index based on a survey of purchasing managers in both industries dropped to 49.7 from 50.4 in January, London-based Markit Economics said in an initial estimate released by e-mail today. Economists had forecast a reading of 50.5, according to the median of 16 estimates in a Bloomberg News survey.

A separate report showed German services and manufacturing expansion unexpectedly slowed in February amid declining orders at factories in Europe’s largest economy.
Unexpected?!

Exactly why anyone thought this would not happen is a mystery. The second mystery is why the data is so "good". Let's take a look at the actual data.

Markit Flash Eurozone PMI®

Please consider Markit Flash Eurozone PMI

  • Flash Eurozone PMI Composite Output Index at 49.7 (50.4 in January). Second-highest in six months.
  • Flash Eurozone Services PMI Activity Index at 49.4 (50.4 in January). Second-highest in six months.
  • Flash Eurozone Manufacturing PMI at 49.0 (48.8 in January). Six-month high.
  • Flash Eurozone Manufacturing PMI Output Index at 50.4 (50.4 in January).

The Markit Eurozone PMI® Composite Output Index fell from 50.4 in January to 49.7 in February, according to the preliminary ‘flash’ reading based on around 85% of usual monthly replies. The latest figure signalled a slight contraction in business activity following the marginal expansion seen in January, which had been the first month in which the Index had risen above the 50.0 no-change level since last August.

The latest reading was nevertheless the second-highest of the past six months, and suggests that the Eurozone economy has stabilised over the first two months of the year having contracted in the final quarter of 2011.





Incoming new business fell for the seventh month running, but the rate of deterioration eased for the fourth month in a row to register the smallest drop in demand for six months. Rates of decline eased in both manufacturing and services, with the latter showing the smaller decline. Manufacturers reported the weakest drop in demand for seven months, led by an easing in the rate of loss in new export orders, while the decline in service sector new business was the smallest in the current six-month sequence.

Backlogs of orders fell across the region for the eighth successive month, but at reduced rates in both manufacturing and services. The overall fall was the smallest for six months. However, a combination of falling inflows of new business and lower backlogs of work caused companies to trim their headcounts, leading to a slight drop in employment for the second successive month.

Reductions in headcounts were only marginal in both manufacturing and services, but contrasted with robust employment growth in both sectors during the first half of last year. Employment growth in Germany slowed to the weakest since March 2010, while only a modest gain was seen in France. Elsewhere in the Eurozone, the average rate of job losses eased to a four-month low but remained steep.

Commenting on the flash PMI data, Chris Williamson, Chief Economist at Markit said:

“A retreat back below the 50.0 no-change level for the Eurozone PMI is a disappointment, and highlights the ongoing risk that the region may be sliding back into recession. Although business conditions are showing signs of stabilising so far this year, which represents a marked improvement on the widespread deepening gloom seen late last year, the Eurozone is by no means out of the woods. Demand needs to improve considerably in coming months before we can safely say that the region will return to anything like reasonable growth.

“Encouragingly, business confidence continues to improve on the better news flow surrounding the sovereign debt crisis and renewed stimulus from the ECB. But even German companies remain unsure about the outlook, and many are clearly seeking to cut costs where possible in order to be more competitive in a tough business environment.

“Sharp divergences in performance also continued to be evident across the region, with modest growth in Germany contrasting with a steep decline in the periphery. Given the lack of domestic demand in austerity-hit peripheral countries, this divergence looks set to continue for some time.”
Expect German-Periphery Divergence to Resolve to the Downside for Germany

The idea that Europe can avoid a recession is complete silliness. Europe is clearly in a recession already.

The amazing thing is things have not deteriorated more than they have. Unlike the Chief Economist at Markit, I expect the divergence to resolve to the downside for Germany, not for the divergence to continue for some time. Given conditions in Europe and Asia, the odds that Germany is immune from the global slowdown are essentially zero.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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