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.

 

(emphasis added)

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.

 


 

EZ-PMI
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:

 


 

EZ-TMS-growth

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.

 


 

TARGET-2
The latest TARGET-2 figures, via the IFO Institute – click to enlarge.

 


 

Conclusion:

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


 

 
 

Emigrate While You Can... Learn More

 
 

 

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

   
 

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • tintedFree Money Leaves Everyone Poorer
      Destroying Lives BALTIMORE – A dear reader reminded us of the comment, supposedly made by Groucho Marx: “A free lunch? You can’t afford a free lunch.”   Groucho dispensing valuable advice Photo via imdb.com   He was responding to last week’s Diary about the national referendum in Switzerland on Saturday. Voters will decide whether to give all Swiss residents a free lunch – a guaranteed annual income of about $30,000 a year [ed note: the initiative was...
  • French labour union workers and students attend a demonstration against the French labour law proposal in Marseille, France, as part of a nationwide labor reform protests and strikes, March 31, 2016. REUTERS/Jean-Paul Pelissier/File PhotoHow the Welfare State Dies
      Hollande Threatens to Ban Protests Brexit has diverted attention from another little drama playing out in Europe. As of the time of writing, if you Google “Hollande threatens to ban protests” or variations thereof, you will find Russian, South African and even Iranian press reports on the topic. Otherwise, it's basically crickets (sole exception: Politico).  Gee, we wonder why?   They don't like him anymore: 120.000 protesters recently turned Paris into a war zone. All...
  • offendFree Speech Under Attack
      Offending People Left and Right Bill Bonner, whose Diaries we republish here, is well-known for being an equal opportunity offender  - meaning that political affiliation, gender, age, or any other defining characteristics won't save worthy targets from getting offended. As far as we are concerned, we generally try not to be unnecessarily rude to people, but occasionally giving offense is not exactly beneath us either.   The motto of the equal opportunity...
  • cameron-doomedMoving Closer to BREXIT
      Polls Show Growing Support for a Break with the EU In the UK as elsewhere, the political elites may have underestimated the strength of the trend change in social mood across Europe. The most recent “You-Gov” and ICM pools show a widening lead in favor of a UK exit from the EU as the day of the vote comes closer.   Pro-BREXIT campaigners Boris Johnson (ex-mayor of London) and Michael Gove (UK Secretary of Justice) are in a good mood. Photo credit: Paul Grover /...
  • water houseA Market Ready to Blow and the Flag of the Conquerors
      Bold Prediction MICHAELS, Maryland – The flag in front of our hotel flies at half-mast. The little town of St. Michaels is a tourist and conference destination on the Chesapeake Bay. It is far from Orlando, and even farther from Daesh (a.k.a. ISIL) and the Mideast.   St. Michaels, Maryland – the town that fooled the British (they say, today). Photo credit: Fletcher6   Out on the river, a sleek sailboat, with lacquered wood trim, glides by, making hardly a...
  • The-answer-is-yesToward Freedom: Will The UK Write History?
      Mutating Promises We are less than one week away from the EU referendum, the moment when the British people will be called upon to make a historic decision – will they vote to “Brexit” or to “Bremain”? Both camps have been going at each other with fierce campaigns to tilt the vote in their direction, but according to the latest polls, with the “Leave” camp’s latest surge still within the margin of error, the outcome is too close to call.   The battle lines are...
  • MACAU, CHINA - JANUARY 28: Buildings of Macau Casino on January 28, 2013, Gambling tourism is Macau's biggest source of revenue, making up about fifty percent of the economy.What Could Possibly Go Wrong?
      A Convocation Of Gamblers The Wall Street Journal and BloombergView have just run articles on the shadow banking system in China.  This has put me in a nostalgic mood. About 35 years ago when I was living in Japan, I made a side trip to Hong Kong.   Asia's Sin City, Macau Photo credit: Nattee Chalermtiragool   I took the hydrofoil to Macau one afternoon and the same service back early the next morning.  On the morning trip, I am sure that I saw many of the...
  • tree removal permit-1The Real Reason We Have a Welfare State
      From Subject to Citizen BALTIMORE – June 5th, the Swiss cast their votes and registered their opinions: “No,” they said. We left off yesterday wondering why something for nothing never works. Not as monetary policy. Not as welfare or foreign aid. Not in commerce. Not never, no how. But something for nothing is what people most want.   The future Switzerland just managed to dodge... for now   The Swiss voted against awarding all citizens a “universal basic...
  • junkThe Problem with Corporate Debt
      Taking Off Like a Rocket There are actually two problems with corporate debt. One is that there is too much of it... the other is that a lot of it appears to be going sour.   Harvey had a good time in recent years...well, not so much between mid 2014 and early 2016, but happy days are here again! Cartoon by Frank Modell   As a brief report at Marketwatch last week (widely ignored as far as we are aware) informs us:   “Businesses racked up debt in the...
  • saupload_loves-me-loves-me-notA Darwin Award for Capital Allocation
      Beyond Human Capacity Distilling down and projecting out the economy’s limitless spectrum of interrelationships is near impossible to do with any regular accuracy.  The inputs are too vast.  The relationships are too erratic.   The economy - complex and ever-changing interrelations. Image credit: Andrea Dionne   Quite frankly, keeping tabs on it all is beyond human capacity.  This also goes for the federal government.  Even with all their data gatherers and...
  • nails-in-a-bed-of-nails-new-yorker-cartoonGoing... Going... Gone! The EU Begins to Splinter
      Dark Social Mood Tsunami Washes Ashore Early this morning one might have been forgiven for thinking that Japan had probably just been hit by another tsunami. The Nikkei was down 1,300 points, the yen briefly soared above par. Gold had intermittently gained 100 smackers – if memory serves, the biggest nominal intra-day gain ever recorded (with the possible exception of one or two days in early 1980). Here is a picture of Haruhiko Kuroda in front of his Bloomberg monitor this...
  • queen_gold-840x501Rule Britannia
      A Glorious Day What a glorious day for Britain and anyone among you who continues to believe in the ideas of liberty, freedom, and sovereign democratic rule. The British people have cast their vote and I have never ever felt so relieved about having been wrong. Against all expectations, the leave camp somehow managed to push the referendum across the center line, with 51.9% of voters counted electing to leave the European Union.   Waving good-bye to...

Austrian Theory and Investment

Support Acting Man

Own physical gold and silver outside a bank

Archive

j9TJzzN

350x200

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com