Slight Bounces in Manufacturing, Weakness in Services

Markit has published its latest Flash PMI data for the euro area and several individual countries in Europe, and the news remain grim. The PMI composite for the euro area as a whole has bounced fractionally to a two month high due to a slightly better manufacturing PMI reading, but the services component has declined steeply, resulting in continued weakness overall.  From Markit's summary of the data:


The Markit Eurozone PMI Composite Output Index was little-changed in November according the flash estimate, up fractionally from 45.7 in October to 45.8. October’s reading had been the lowest since June 2009 and, for the fourth quarter of 2012 so far, PMI data suggest the strongest contraction of output since the second quarter of 2009.”


(emphasis added)






The current gap between the euro area PMI and GDP is likely to be eventually closed via a decline in GDP – click for better resolution.



Chris Williamson, Markit's chief economist, commented as follows:

“The eurozone economy continued to deteriorate at an alarming pace in November, and is entrenched in the steepest downturn since mid-2009.

“Officially, the region saw only a very modest slide back into recession in the third quarter, with GDP falling by a mere 0.1%, but the PMI suggests that the downturn is set to gather pace significantly in the fourth quarter. The final three months of the year could see GDP fall by as much as 0.5%.

“While it is reassuring to have seen signs of stabilization in some survey indicators, the overall rate of decline remains severe and has spread to encompass Germany, suggesting the situation could deteriorate further in the coming months. With jobs being cut at the second-fastest rate since January 2010 and expectations for the year ahead in the services sector slumping to the lowest since March 2009, firms have clearly become increasingly anxious about the economic outlook and are seeking to control costs as much as possible. All this suggests that any swift return to growth is unlikely.”


(emphasis added)

The complete report can be accessed here (pdf).

Furthermore,  here are links to the flash PMI reports of Germany and of France, both of which are in essence very similar  to the euro area wide survey results (in other words, a horror-show).

Readers should keep in mind that PMI data are diffusion indexes – any reading below the 50 level signifies contraction (a plurality of negative indications from the companies surveyed). From time to time the indexes will bounce a little because one or the other sub-component is improving, but as long as we get readings well below 50 overall, the outlook remains bleak. Moreover, if one looks at the sub-components in detail, we can see that prices have risen, but both the all important order backlog and employment components remain in steep decline. This is basically the worst combination possible.


Money Supply Expansion Accelerates

We would however add to this that money supply growth in the euro area is lately accelerating again. What we see in the PMI data above is the lagged effect of the steep slowdown in money supply growth in the years 2010 and 2011, which was a direct result of the combination of collapsing bank lending and fiscal austerity (austerity plays into it because it means the supply of bonds for monetization purposes has slowed down a bit). 

As painful as a recession is, especially in the peripheral countries where major bubble activities have collapsed, it is the economy's way of healing itself. It would make little sense to artificially support, say, the construction industry in Spain and Ireland, given that the housing bubble has left both countries with a massive oversupply of houses. However, the liquidation of malinvested capital in such an important sector of the economy naturally is an especially painful process. An enormous amount of wealth has been squandered, and it is to be welcomed that money supply growth has slowed over 2010-2011, as that has averted the resumption of economic activities that are likely to squander real wealth.

Now that money supply growth is re-accelerating, one must expect a lagged reaction in economic activity and economic data as well. As of the end of September, true money supply growth in the euro are has accelerated to 5.6% year-on-year and was growing at a 5.5% annualized pace in the quarter and 11.7% annualized in the month (as always, the data and related charts come via Michael Pollaro).

It remains to be seen of course whether this pace can be maintained or even increased in coming months. So far, the ECB's ample provision of credit has had far less effect on money supply growth than the inflationary push of 2008-2009, but it appears that there are reasons to expect bank lending in the euro area to grow once more, in spite of the fact that European banks are severely capital challenged at this time (i.e., many are Potemkin villages that are only pretending at solvency).



Euro area – the true money supply in billions of euro, TMS year-on-year growth and M3 y-o-y growth – click for better resolution.



The source of increased lending in the euro area are apparently not European banks, but chiefly US banks. To be sure, their share of the overall credit pie is still small, but  it appears to be growing fast.

According to a recent press report:

American banks having a hard time finding credit-worthy customers near home are finding more business in an unlikely spot — Europe.

At a time when credit problems in Greece, Spain and elsewhere on the continent are dominating headlines, U.S. lenders have been able to capitalize on the crisis by taking business away from European banks.

Bank lending may seem sparse in the U.S., but that's largely a matter of perception. Bank lending is actually on the rise, but only to borrowers with nearly spotless qualifications.

In Europe, meanwhile, lending standards are tightening while credit conditions are worsening, according to the most recent bank lending survey from the European Central Bank. Worsening economic conditions have put pressure on banks there while opening opportunities for well-capitalized institutions in the U.S., where the economy is managing to eke out at least slow growth.

"In all, this suggests that the ECB is still struggling to ease financial conditions as business cycle dynamics remain very adverse," economist at Nomura Securities said in a note. "The ongoing tightness in credit conditions in some euro-area countries remains the biggest challenge for the ECB."

Recent numbers show that American lenders have taken their largest-ever share of lending to European customers, a direct outgrowth of retrenchment from banks in financially troubled nations having to rein in their businesses to weather the sovereign debt storm.

U.S.-originated loans to European customers have totaled about $25 billion in 2012, which is nearly 5 percent of Europe's total loan volume and triple the share from the same period last year, according to Dealogic.


(emphasis added)

Clearly though this lending activity is significant at the margin. While  uncovered money substitutes (the major money residual stemming from fractionally reserved lending) grew still at a negative 8.5% year-on-year as of September, they were growing at a positive 13.4% annualized rate in the month and a 10.5% annualized rate in the past quarter. This indicates that overall, bank lending is currently picking up strongly in the euro area.

Since uncovered money substitutes are effectively 'money from thin air', the usual effects can be expected to be set into motion with a lag. This will probably be hailed as a 'recovery' at some point down the road, but if it were possible to create wealth by increasing the money supply, we would of course all have long ago arrived in the Land of Cockaigne.

And no, this is not something we need to test experimentally over and over again to be absolutely sure. It has never worked and won't work this time around either.




Charts by: Markit, Michael Pollaro




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