Pace of Contraction Slows in the Euro Area
The final euro area PMI readings for May were delivered this week, and they showed some improvement – in some cases notable improvement. Although manufacturing remains in contraction across the euro area and in all the large member nations, there was a clear slowdown in the pace of the downturn. For instance, after the Flash PMI for the entire euro area came in at 47.8, the actual number clocked in at a somewhat better 48.3. Below is the comment by Markit's chief economist Chris Williamson on the data:
“Although the euro area manufacturing economy continued to contract in May, it is reassuring to see the rate of decline ease to such a marked extent. The sector still seems some way off stabilizing, however, and therefore remains a drag on the economy.
“Despite the final PMI coming in above the flash reading, the surveys still suggest that GDP is likely to have fallen 0.2% in the second quarter, extending the region’s recession into a seventh successive quarter.
“Policymakers will nevertheless be pleased to see the downturn not getting any worse, suggesting the ECB will see no immediate need for further action at its June meeting. In particular, the surveys brought good news in terms of signs of stabilisation in Germany and export-led growth in Italy and Spain, the latter suggesting structural reforms are boosting competitiveness.
“France remains a key concern, having contracted at a steeper rate than Spain and Italy throughout the year so far. The ongoing marked fall in employment and the steepest drop in factory gate prices for three-and-a-half year also act as sobering reminders that the region faces the twin problems of unemployment rising to new record highs and underlying deflationary pressures.”
Evidently, Mr. Williamson also suffers from deflation phobia, quite unnecessarily as you will see further below. By and large the reports can be considered good news, what is however noteworthy on the negative side of the ledger is the poor performance of France (although even France's PMI data actually improved considerably last month; this is more a general remark on its weak relative performance). France not only suffers from the knock-on aftereffects of the debt crisis, but is chafing under the crazy ideas implemented by its socialist government as well. In this context consider this recent morsel published by Mish: France considers a ban on free shipping by Amazon. Seriously – in the country that brought forth the man who wrote the 'Petition of the Candle-makers'. Hollande's government thinks it can 'help' the economy by making things more expensive for consumers. We once said that the Hollande government has pushed France back by three decades, but we may have to amend that judgment. How about three centuries?
Mish seems to suspect something similar, as he asks (in reference to the culture minister, whose compost heap this idea has grown out of): “So when does this fool announce a tax on Kindle or a campaign to bring back the horse and buggy?” It's reasonable question.
Euro area manufacturing PMI: still in contraction territory, but getting better.
Here are the links for the various PMI reports (pdf) with a brief comment:
- Euro Zone PMI: weakest downturn in 15 months
- Germany PMI: three month high (but still contracting)
- France PMI: a thirteen month high, but not much to write home about anyway, at a level of 46.4
- Spain PMI: a two year high at 48.1, that is actually quite impressive. Of course, Spain is such a waste-land now that improvements start from a considerably reduced base. However, this may be a first indication that the liquidation of malinvested capital may have run its course.
- Italy PMI: a four month high, but at 47.3 one of the weaker reports as well
- Greece PMI: this is actually noteworthy. It is at a 23 month high, which is obviously good news. Guess at what level: 45.3. That illustrates how deep the Greek depression was and still is.
What Has Caused the Better Performance?
After being in recession for such an extended period, several of the hardest hit nations (see our comment on Spain above) have without a doubt rearranged their production structure to a more sustainable configuration. After all, unless you were a bank, you couldn't hope for a bailout, so companies had to help themselves as best as they could. So to some extent the real economy is surely on a more solid footing than previously in a number of member states. Spain is incidentally one of the few countries in which fiscal spending has actually not grown further, but slightly declined. This removes a significant burden from the economy.
However, we also suspect it has quite a lot to do with what can be seen on the next chart:
The annual growth rates of money TMS and M3 in the euro area. TMS growth has reached a multi-year high of 7.1% year-on-year as of the end of March (and from what we have heard, the rate of growth has continued to accelerate in April). Chart via Michael Pollaro – click to enlarge.
On a one month basis, euro area TMS growth was 12.6% annualized in March alone, with the biggest growth factor a 58.5% annualized expansion in uncovered money substitutes by commercial banks (15.4% year-on-year), even as they paid back ECB credit from the LTROs. Currency increased by 17.7% annualized in March, which is possibly due to the 'Cyprus effect' (people withdrawing cash from banks). It is all the more noteworthy that uncovered money substitutes increased at such a 'healthy' pace.
Looking at the chart of the year-on-year TMS growth rate in the euro area above, it immediately becomes clear that its wild oscillations (so much for the ECB's vaunted 'stability') tend to correlate very closely with the pace of economic activity and the recurring crisis conditions in the euro area, with a slight lead time. Note specifically the declines in the money supply growth rate into 2000, 2007/2008 and 2009/10 – whenever the growth rate slows sufficiently, the underlying economic reality is unmasked and crisis conditions soon arise.
One reason for the abatement of the crisis and the willingness of banks to once again increase the amount of fiduciary media (money created from thin air) is probably that inner-European pressure on current accounts is easing. This can be gleaned from the improvement in the TARGET-2 imbalances (the payments system was used to 'paper over' depositor flight and capital account shortfalls in the worst-hit countries with current account deficits). In addition, since Mario Draghi's 'OMT' announcement, the carry trade in Spanish and Italian government debt has intensified further, a sign that banks are no longer worried about their exposure to sovereign debt. With that worry gone, a renewed phase of credit expansion is now underway.
The economic situation in the euro area is improving in terms of activity, but much of it is probably owed to the renewed expansion in money and credit by commercial banks. Very few of the underlying structural problems have been solved, and in one very important country – namely France – the administration has actually managed to add to them. In some countries like e.g. Spain and Greece, the depth of the downturn has forced governments to tighten their belts and be a bit more vigorous with their reform efforts. However, it is very difficult to sort out to what extent a slightly sounder policy framework and to what extent the money supply expansion is responsible for the better data. Experience shows that the latter is probably the main driver of activity, and as such it is nothing more than another echo boom searching for needle that pricks the balloon.
An additional remark: money supply growth is currently galloping away in every major currency area – especially the short term growth rates are rather astounding and long term growth rates are catching up accordingly. We plan to post a comprehensive update on the topic later this week.
Charts by: Markit, Michael Pollaro, IFO Institute
Dear readers, we are greatly honored by your readership and sincerely hope that our special mixture of entertainment and education continues to add a little value to your lives. As you can probably guess, our blog is not really a giant commercial enterprise, for that its readership is too exclusive and small. Nevertheless, running it involves not only time and effort, but also monetary costs. We are therefore starting another fundraising drive. You can help us reach our funding goal by either donating directly via Paypal or via Bitcoin.
Thank you for your support!Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke
Most read in the last 20 days:
- The Stock Market in Trouble - How Bad Can it Get?
A Look at the Broader Market's Internals We have previously discussed the stock market's deteriorating internals, and in light of recent market weakness want to take a brief look at the broader market in the form if the NYSE Index (NYA). First it has to be noted that a majority of the stocks in the NYA are already in bearish trends. The chart below shows the NYA and the percentage of stocks above their 200 day and 50 day moving averages, which is 39.16% and 33.77% respectively. When...
- Gold Stocks: A Playable Rally May Be Beginning as Junk Bonds Crater
Gold Stocks Jump and Retrace 50% Last week we discussed the potential for a rally in the gold sector (see: “Gold Stocks at an Interesting Juncture” for details). Gold stocks jumped early in the week and then retraced almost precisely 50% of the initial move higher, in the process closing a gap that was left behind on Wednesday. Image credit: dreamstime.com Interestingly, for the first time in many months, there were three up days in a row prior to the...
- A new Multi-Year High in Buying by Gold Sector Insiders
Latest Data from INK Show A Huge Surge in Insider Buying As our friends at INK Research in Canada have pointed out to us, insiders at gold companies have made use of the recent sell-off in the sector to load up on shares to an extent not seen in many years. Image source: bidness etc The INK insider buy/sell indicator for gold stocks has peaked just one day after China's initial devaluation announcement at nearly 1,200%: INK's gold insider sentiment...
- Is Crude Oil Close to a Low?
Panicky Headlines Everybody knows that there is a never-ending glut in crude oil, right? Who knew about it a year ago? Not everybody, that much is certain. The problem with what everybody knows is of course that it is often not worth knowing. Photo credit: Alamy Today a friend pointed two articles out to us that have been published yesterday and today. Their headlines say it all. The Wall Street Journal writes “No End in Sight for Oil Glut” - and proceeds to...
- The Stock Market's Panic Potential
The Odds Favor a “Warning Shot” Scenario - but there is a “But” As regular readers have probably noticed, we have upped the frequency of our “caution is advised” posts on the stock market in recent weeks in light of the market's increasingly deteriorating internals. Although one never knows when exactly such warning signs may begin to matter, it is always a good bet that they eventually will. Last week the market delivered a little wake-up call to the hitherto rather...
- The Donald and China, or The Fallacy of Protectionism
Not Every Populist Topic is Worth Exploiting For reasons that will forever remain a mystery to us, mercantilism and protectionism actually hold enormous popular appeal. The best explanation we can come up with for this phenomenon is that the support for such policies is based on a mixture of economic ignorance and relentless propaganda by vested interests over the past, say, four centuries. Still, it is almost comical that people are so vociferously clamoring for policies that can actually...
- Real Wealth and Phantom Wealth – Secular Boom and Bust
The Things that Produce Real Wealth vs. Phantom Wealth Our friend Michael Pollaro, the keeper of long-term data on the true money supply and author at Forbes as well as occasionally a guest author on this site, recently sent us the following chart of a relationship he keeps a close eye on. It depicts the annual change rate in new orders for non-defense capital goods and compares this series to the Wilshire total market index. Photo via...
- The Economy is in Liquidation Mode
Capital Consumption If you’re an American over a certain age, you remember roller skating rinks (I have no idea if it caught on in other countries). This industry boomed in the 1970’s disco era. However, by the mid 1980’s, the fad was fading. Imagine running a rink company at the end of the craze. You know it is not going to survive for long. How do you operate your business? The birthplace of roller disco turned out to be edible, sort of Photo via...
- Jackson Hole – Meeting of the Physics Envy Brigade
Planners Meet to Discuss the Impossible The Jackson Hole pow-wow takes place this weekend. A more revolting get-together of actual and armchair central planners (i.e., the advisors to the planners, many of whom see themselves as planners-in-waiting) could hardly be imagined. One has to wonder how much more damage they will be allowed to inflict before someone finally says “enough!”. The parlous state of the global economy and the series of booms and busts we have experienced over the...
- The Stock Market After the Mini Crash
A Post Mortem – the Influence of Black Box Systems Here is a brief update on the recent market action and what we think one should watch out for now. First of all, we already noted in our last market update that something about the recent “mini crash” was quite unusual. For one thing, it started to get serious in an options expiration week, which happens only rarely. One rather scary precedent is actually the 1987 crash: on that occasion the market declined sharply during expiration...