Hope vs. Reality; Eurozone Downturn Intensifies, Led by Sharpest Drop in French Private Sector Output in Four Years

There are few sure bets economically speaking (especially if one has to put a timeframe on them), but some things come close. One easy call was for a continued implosion in France.

Sure enough the Markit Flash France PMI shows Sharpest fall in French private sector output for four years.

Key points:

• Flash France Composite Output Index posts 42.1 (43.1 in February), 4-year low
• Flash France Services Activity Index drops to 41.9 (43.7 in February), 49-month low
• Flash France Manufacturing PMI unchanged at 43.9
• Flash France Manufacturing Output Index rises to 42.8 (41.8 in February), 3-month high

Summary:

Private sector firms in France reported a further steep decline in output during March. Moreover, the rate of contraction accelerated to the sharpest in four years. This was signalled by the Markit Flash France Composite Output Index, based on around 85% of normal monthly survey replies, falling from 43.1 in February, to 42.1. 

Dragging the composite figure down was a faster decline in service sector business activity during March. The latest fall was the steepest since February 2009. Manufacturing output was also down markedly, but the pace of decline eased slightly to the slowest in three months. Incoming new business also decreased at a sharper rate in March. Mirroring the trend seen for activity, the latest reduction in new work was the fastest in four years.

Employment in the French private sector fell further during March. The pace of job shedding remained solid, despite moderating to the slowest in three months. Job losses were broad-based across services and manufacturing, and at similar rates.

France Economic Activity vs. GDP



Care to guess where French GDP is headed?

France Drags Eurozone Lower

The Markit Flash Eurozone PMI shows Eurozone downturn intensifies for second month running in March.

Key Points:

• Flash Eurozone PMI Composite Output Index at 46.5 (47.9 in February). Four-month low.
• Flash Eurozone Services PMI Activity Index at 46.5 (47.9 in February). Five-month low.
• Flash Eurozone Manufacturing PMI at 46.6 47.9 in February). Three-month low.
• Flash Eurozone Manufacturing PMI Output Index at 46.5 (47.8 in February). Three-month low.

Summary:

The Markit Eurozone PMI ® Composite Output Index fell from 47.9 in February to 46.5 in March, according to the flash estimate. The decline signalled an acceleration in the rate of contraction of business activity for the second consecutive month to the steepest experienced for four months. With the exception of a marginal increase in January of last year, business activity has fallen continually since September 2011.

Manufacturing output fell in March at the fastest rate since December, while business activity in the service sector suffered the steepest decline since October. Companies also reported that new business levels fell at the strongest rate for three months, dropping at the fastest rates since December and September in manufacturing and services respectively.

Employment fell for the fifteenth successive month, reflecting the need to reduce capacity in line with the ongoing deterioration in inflows of new orders and a further marked decline in backlogs of uncompleted orders.

Comments:

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

“Instead of the eurozone economy stabilising in the second quarter, as many – including the ECB – have been hoping to see, the downturn could therefore intensify in coming months. ... France saw the steepest downturn in business activity since March 2009, rounding off the worst quarter for four years, while Germany looks set to have enjoyed reasonable if unspectacular growth. However, even Germany showed worrying signs of growth fading in March, driven by a return to contraction of its manufacturing sector.”

Hope vs. Reality

Markit economist Chris Williamson wrote "Instead of the eurozone economy stabilising in the second quarter, as many – including the ECB – have been hoping to see ..."

We now know the rest of the story, but the story was easy to predict in advance.

Illusions of Stabilization

It was not only the ECB who was "hoping", but also Markit economist Chris Williamson. Flashback, February 7, 2013: 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.

Illusion of Eurozone Stabilization

There is no real stabilization and there is no healing. Rather, the policies of Hollande are so disastrous that some output has shifted to Germany and elsewhere, (coupled perhaps with some inventory replenishment and a temporary stimulus-fueled increase in demand in Asia).

Properly rebalancing will require a shift in production from Germany to the rest of Europe as well as a shift towards more consumption in Germany from the rest of Europe. That cannot and will not happen with the destructive polices of Hollande, and the lack of reforms in Spain and Italy.

Moreover, and as I have noted on many occasions, the entire Euro construct is flawed. Until those flaws are fixed, there is only the illusion of stabilization, and that based on more unbalanced growth.

The only thing that has stabilized (for now) is interest rates, and even that won't last.

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