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Wednesday, March 06, 2013 12:34 PM


Eurozone Downturn Accelerates Despite German Growth; Divergence to France Widest in 15 Years


The Markit Eurozone Composite PMI Final Data shows the Eurozone downturn accelerates.

Key Points:

Final Eurozone Composite Output Index: 47.9 (Flash 47.3, January 48.6)
Final Eurozone Services Business Activity Index: 47.9 (Flash 47.3, January 48.6)

At 47.9 in February, the Markit Eurozone PMI® Composite Output Index came in above the earlier flash estimate of 47.3 but remained down on January’s reading of 48.6. The index therefore signalled a steepening of the downturn in business activity, contrasting with the easing trend which had been evident in the three months to January.



Divergence to France Widest in 15 Years

Chris Williamson, Chief Economist at Markit said: “The dip in the Eurozone PMI compared to January is a disappointment, but the region still looks set to see a much smaller drop in GDP in the first quarter compared to the 0.6% decline seen in the final quarter of last year, with the PMI so far consistent with a 0.2% GDP decline.

“Worryingly, the divergence between Germany and France so far this year is the widest in the 15-year survey history. Germany is on course to see the strongest quarterly growth since the spring of 2011, but France is contracting at the fastest rate for four years.

“The deteriorating picture in the periphery is also a concern. Rates of decline picked up in Italy and Spain, with further weakness likely in Italy especially in coming months due to the uncertainty caused by the elections.

“The outlook therefore seems to largely depend on whether Germany can continue to expand and offset the weakness in France, Italy and Spain, which seems a tall order, meaning hopes of a return to growth for the region by mid-2013 are now looking too optimistic.”
Illusions of Stabilization

Williamson has now changed his tune to something more in line with what I stated on February 7 in Illusions of Stabilization
In Germany Rebounds but ... I noted a recovery "of sorts" in Germany, a contraction in France at the steepest rate in four years, and a record decrease in services employment in Italy.

Thus, it should be no surprise to see the Markit Eurozone Composite PMI® shows national divergence hits record high.

Yet, in aggregate, the eurozone contraction decelerated with the eurozone composite PMI rising from 47.2 to 48.6.

So, what's it all mean?

Chris Williamson, Chief Economist at Markit offered this interpretation: "The eurozone is showing clear signs of healing, with the downturn easing sharply in January and the region moving closer to stabilisation in the first quarter. ...."

No Signs of Healing

I disagree with Williamson. Those divergences show the eurozone is getting sicker, not healing.

If there was any healing, and certainly if there was any rebalancing, manufacturing and export growth would be picking up in Spain, in Italy, and in France at the expense of Germany.

A quick check of the Markit Eurozone Manufacturing PMI will show that is not what's happening.
There were no signs of stabilization last month, in January, or in December. And with the clear deterioration in France, imbalances have accelerated to the downside.

In regards to Williamson's forecast of a 0.2% GDP decline, I will take "the under". Should "the over" line be right, don't expect it to last too long.

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

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