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 happy to report that we have reached our turn-of-the-year funding goal and want to extend a special thank you to all of you who have chipped in. We are very grateful for your support! As a general remark, according to usually well informed circles, exercising the donation button in between funding drives is definitely legal and highly appreciated as well.
Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke
Most read in the last 20 days:
- A Historic Rally in Gold Stocks – and Most Investors Missed It
Buy Low, Sell High? It is an old truism and everybody has surely heard it more than once. If you want to make money in the stock market, you're supposed to buy low and sell high. Simple, right? Successful stock market investing in two simple steps Photo via slideshare.net As Bill Bonner once related, this is how a stock market advisor in Germany explained the process to him: Thirty years ago, at an investment conference, there was a scalawag analyst...
- Gold Stocks Break Out
No Correction Yet Late last week the HUI Index broke out to new highs for the move, and so did the XAU (albeit barely, so it did not really confirm the HUI's breakout as of Friday). Given that gold itself has not yet broken out to a new high for the move, it would normally be expected to do so, as Jordan Roy-Byrne argues here. Photo via Museo del Oro / Bogota The chart below shows the situation as of Friday (HUI, HUI-gold ratio and gold): The HUI and...
- Why is the Stock Market so Strong?
Dismal Earnings, Extreme Valuations The current earnings season hasn't been very good so far. Companies continue to “beat expectations” of course, but this is just a silly game. The stock market's valuation is already between the highest and third highest in history depending on how it is measured. Photo credit: Kjetil Ree Corporate earnings are clearly weakening, and yet, the market keeps climbing. The rally is a bit of a “all of worry” type of...
- Weekly Resistance Levels in the HUI
Options Expiration Ante Portas - Just as a Resistance Level is Reached After we had penned our little missive on the breakout in gold stocks on Monday, it dawned on us that an options expiration takes place this week. Normally, gold stocks decline into the expiration date. Don't hold us to this, but the last time we remember call writers being forced to delta-hedge their way out of trouble in gold and silver stocks right at the end of an expiration week was sometime in 2006. Given...
- Cultural Marxism and the Birth of Modern Thought-Crime
What the Establishment Wants, the Establishment Gets If a person has no philosophical thoughts, certain questions will never cross his mind. As a young man, there were many issues and ideas that never concerned me as they do today. There is one question, however, which has intrigued me for the longest time, and it still fascinates me as intensely as it did back then: Does spirit precede matter or is it the other way around? In other words, does human consciousness create what we...
- China – A Reversal of Urbanization?
Economic and Demographic Changes We have discussed China's debt and malinvestment problems in these pages extensively in the past (most recently we have looked at various efforts to keep the yuan propped up). In a way, China is like the proverbial “watched pot” that never boils though. Its problems are all well known, and we have little doubt that they will increasingly find expression. China's credit bubble is one of the many dangers hanging over the global economy's head, so to...
- State of Fear - Corruption in High Places
Mr. X and his Mysterious Benefactors As the Australian Broadcasting Corporation (ABC) reports, a money-laundering alarm was triggered at AmBank in Malaysia, a bank part-owned by one of Australia's “big four” banks, ANZ. What had triggered the alarm? Money had poured into the personal account of one of the bank's customers, a certain Mr. X, in truly staggering amounts. A recent photograph of Mr. X. Photo credit; Peter Foley / Bloomberg via Getty...
- Why All Central Planning Is Doomed to Fail
Positivist Delusions [ed. note: this article was originally published on March 5 2013 – Bill Bonner was on his way to his ranch in Argentina, so here is a classic from the archives] We’re still thinking about how so many smart people came to believe things that aren’t true. Krugman, Stiglitz, Friedman, Summers, Bernanke, Yellen – all seem to have a simpleton’s view of how the world works. A bunch of famous people with a simpleton view of how the...
- Gold and Negative Interest Rates
The Inflation Illusion We hear more and more talk about the possibility of imposing negative interest rates in the US. In a recent article former Fed chairman Ben Bernanke asks what tools the Fed has left to support the economy and inter alia discusses the use of negative rates. We first have to define what we mean by negative interest rates. For nominal rates it’s simple. When the interest rate charged goes negative we have negative nominal rates. To get the real rate of...
- Russian Aggression Unmasked (Sort Of)
Provocative Fighter Jocks Back in 2014, a Russian jet made headlines when it passed several times close to the USS Donald Cook in the Black Sea. As CBS reported at the time: “A Pentagon spokesperson told CBS Radio that a Russian SU-24 fighter jet made several low altitude, close passes in the vicinity of the USS Donald Cook in international waters of the western Black Sea on April 12. While the jet did not overfly the deck, Col. Steve Warren called the action "provocative and...
- US Economy – Ongoing Distortions
Business under Pressure A recent post by Mish points to the fact that many of the business-related data that have been released in recent months continue to point to growing weakness in many parts of the business sector. We show a few charts illustrating the situation below: A long term chart of total business sales. The recent decline seems congruent with a recession, but many other indicators are not yet confirming a recession - click to enlarge. Wholesale...
- Argentina – The Times, They Are A-Changing
Our Argentine “Ranch Rebellion” Is Over… for Now… BUENOS AIRES, Argentina – Not much action on Wall Street yesterday. The Dow sold off slightly. Gold and oil were up a bit. How about here in Argentina? “Everything has changed. Everything.” Mauricio Macri shortly after his election – indicating that he actually has a plan. Photo credit: Enrique Marcarian / Reuters One of the analysts in our Buenos Aires office explained how the recent...