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
We are happy to report that our funding target has been reached – once again, a hearty thank you to all contributors, your support is greatly appreciated!
As a result of us having gotten from A to B, the annoying graphic is hereby retired. However, be aware that the donations button continues to exist. It is actually perfectly legitimate to use it during the non-funding season as well; assorted advantages we have listed that often result from doing so are likewise persistent (i.e., increased happiness, children including you in their songs, potential obtaining of privileges in the hereafter, etc., etc.). Unfortunately we can't promise that it will make the gold price go up, but we're working on that.
Thank you for your support!
To donate Bitcoins, use this address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke
Most read in the last 20 days:
- The Baby Boomer Survival Guide (Part I)
The Yellow Machines Go Silent PARIS – What should you do if you are running out of time and money? This is the question we get from readers over 50… over 60… and sometimes over 70. We baby boomers were famously “na… na… na… live for today.” Now, it’s tomorrow. And many of us – often through no fault of our own – are having trouble making ends meet. At the Diary, we write about the world of money. About economic policy and how it affects you. But what if,...
- Refugee Crisis Blowback
A Sharp Turn in Swedish Politics When we recently discussed Europe's refugee crisis, we mentioned that a sizable political backlash was to be expected and that unfortunately, extreme nationalist parties were likely to be among the main beneficiaries. We also mentioned the situation of Sweden, where the mainstream political parties in an ongoing fit of political correctness bordering on lunacy have apparently decided to transform Sweden into a province of Mesopotamia. Leader of...
- Tell us Ron, What's the Plan, What's the “Austrian” Plan?
What? No Austrian Prescription? Bloomberg Reporters Cannot Believe It This is truly funny. Ahead of the FOMC decision, Ron Paul, who is well-known as an an implacable critic and enemy of the Fed and a fan of the Austrian School of Economics, was interviewed at Bloomberg as to “what the Fed should do”. What makes it so funny is that the Bloomberg reporters seemingly cannot believe that Austrian economists simply have no “prescriptions” for the Fed. They keep pushing Ron Paul for...
- US Stock Market: A Retest or Worse?
Gray Swans and Black Swans By Monday's close, the S&P 500 Index was closing in on the low established in the August swoon – such a retest was essentially our minimum expectation, as V-shaped rebounds are very rare. The question is now whether it will only be a retest, or if something worse is in the offing. No-one knows for sure of course, but we'll briefly discuss what we are looking at in this context. Image via NYTimes It is interesting that as the market...
- The Baby Boomer Survival Guide (Part II)
A Lehman Moment for Commodities? LONDON – Today, we continue our philosophical look at what you should do if you are running out of time and money. (You can catch up on Part I here.) Where do we begin? With how to add wealth? Or how to lose it? The way to lose it is simple. You buy something that is not worth the money you paid for it. You are instantly poorer, whether you know it or not. The pleasingly plump. Illustration by jdeer69 DJIA, daily...
- Climate Fanatics Run Into Public Relations Snag
Scientists Turn into Stalinists Last week, we happened to stumble across a press report about a group of climate scientists so eager to shut up their critics that they want to employ the State's police, courts and jailers for the purpose. Specifically, a group of academic (and presumably tenured) climate alarmists supporting the “CAWG” theory (CAWG=”catastrophic anthropogenic global warming”) have written a letter to president Obama, attorney-general Lynch and OSTP director...
- Swiss Parliament Shoots Down Socialist Utopia
No “Unconditional Basic Income” Similar to the minimum wage initiative pursued by Geneva-based socialists (which was rejected in a referendum - see “The Swiss Remain Sane” for details), another Utopian socialist dream has just floundered in Switzerland. As the European press reports, this time parliament has shot down a radical proposal forwarded by Socialist Party representative Andreas Gross. Photo via anti-kapitalismus.org Gross wanted the State to pay...