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!

It is that time of the year again – our semi-annual funding drive begins today. Give us a little hand in offsetting the costs of running this blog, as advertising revenue alone is insufficient. You can help us reach our modest funding goal by donating either via paypal or bitcoin. Those of you who have made a ton of money based on some of the things we have said in these pages (we actually made a few good calls lately!), please feel free to up your donations accordingly (we are sorry if you have followed one of our bad calls. This is of course your own fault). Other than that, we can only repeat that donations to this site are apt to secure many benefits. These range from sound sleep, to children including you in their songs, to the potential of obtaining privileges in the afterlife (the latter cannot be guaranteed, but it seems highly likely). As always, we are greatly honored by your readership and hope that our special mixture of entertainment and education is adding a little value to your life!

   

Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke

   
 

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • factoryA Striking Chart
      The Economy and the Stock Market As long time readers know, we are always paying close attention to the manufacturing sector, which is far more important to the US economy than is generally believed. In terms of gross output it is the largest sector of the economy, and it should of course be obvious that saving, investment and production are the only ways to create wealth.   What's left of the Brooklyn Domino Sugar Refinery. Photo credit: Paul Raphaelson   Contrary...
  • trump-putin-1024Trump and Putin Narrowly Escape Assassination Attempt
      The Gloves are Coming Off First a little bit of recent history. Readers are probably aware that some questions about the occasionally malfunctioning Deep State android... no, wait, we'll start again. Questions have recently been raised about the health of presidential candidate Hillary Clinton by various “alt-right” tinfoil hat-wearing conspiracy theorists, such as this one.   The monsters are normally hiding under Hillary's bed, but lately they have come out into the open...
  • historical-photos-pt9-pepsi-factory-baltimore-1956-aUS Economy - Curious Pattern in ISM Readings
      Head Fake Theory Confirmed? This is a brief update on our last overview of economic data. Although we briefly discussed employment as well, the overview was as usual mainly focused on manufacturing, which is the largest sector of the economy by gross output.   Pepsi factory in Baltimore, 1956 Photo via pinterest.com   Readers may recall that we have pointed out for some time that there was quite a large gap between the data reported in regional Fed manufacturing...
  • escobarA Convocation of Interventionists, Part 2
      Pleas for More Deficit Spending We continue with our Jackson Hole post mortem – including remarks that were made by economists and monetary bureaucrats shortly before and after the pow-wow and seem to be connected to the discussions there.   Assembled central planners (we're not sure if this picture was taken at the conference, but most of the people in it were there). Photo credit: Getty Images   We should preface the following with a Mises quote, as the...
  • swing-voterWhy the Fed Destroyed the Market Economy
      What Have You Done for Me Lately? Swing voters are a fickle bunch.  One election they vote Democrat.  The next they vote Republican. For they have no particular ideology or political philosophy to base their judgment upon.   The primacy of the wallet.   They don’t give a rip about questions of small government or big government.  Nor do they have any druthers about the welfare or warfare state. In effect, they really don’t care.  What’s important to the...
  • time-wastersHow is Real Wealth Created?
      An Abrupt Drop Let’s turn back to our regular beat: the U.S. economy and its capital markets. We’ve been warning that the Fed would never make any substantial increase to interest rates. Not willingly, at least.   Groping in the dark, Yellen-style   Each time Fed chief Janet Yellen opens her mouth, out comes a hint that more rate hikes might be coming. But each time, it turns out that the economy is not as robust as she had believed... and that a rate hike isn’t...
  • wallet-367975_960_720Janet Yellen’s Shame
      Playing Politics In honest capitalism, you do what you can to get other people to voluntarily give you money. This usually involves providing goods or services they think are worth the price. You may get a little wild and crazy from time to time, but you are always called to order by your customers.   In the market economy, consumers reign supreme. There is no such thing as a “lost” vote in the marketplace; every penny spent affects production. Mises noted: “Consumers...
  • warren-buffett-gold-coinGet Ready for a New Crisis – in Corporate Debt
      Imposter Dollar OUZILLY, France – We’re going back to basics here at the Diary. We’re getting everyone on the same page... learning together... connecting the dots... trying to figure out what is going on.   The new three dollar bill issued by the Apprehensive States of America.   We made a breakthrough when we identified the source of so many of today’s bizarre and grotesque trends. It’s the money – the new post-1971 dollar. This new dollar is green. You...
  • central bank HQs 2A Convocation of Interventionists – Part 1
      Modern Economics -  It's All About Central Planning We are hereby delivering a somewhat belated comment on the meeting of monetary central planners and their courtier economists at Jackson Hole. Luckily timing is not really an issue in this context.   Central bank headquarters: the Fed's Eccles building, the ECB's hideously expensive new tower in Frankfurt, and the BOJ's Tokyo HQ (judging from the people in the foreground, it may be a source of noxious fumes).   When...
  • silkroadHanjin Marooning in San Pedro Bay
      Global Trade Reversal Expansions and contractions in global trade have played out over long secular trends for thousands of years.  The Silk Road, for example, was established by the Han Dynasty of China in 130 BC, and allowed for continuous trade between East and West for nearly 1,600 years.  In addition to economic trade, the Silk Road was also a conduit for culture and knowledge among its network of civilizations.   A map of the main ancient Silk Road - click to...
  • 4-ip-and-non-def-capital-goods-ordersThe Economy, the Stock Market and the Fed
      John Hussman on Recent Developments We always look forward to John Hussman's weekly missive on the markets. Some people say that he is a “permabear”, but we don't think that is a fair characterization. He is rightly wary of the stock market's historically extremely high valuation and the loose monetary policy driving the surge in asset prices.   The S&P 500 Index and the NYSE advance-decline line. Most market internals weakened steadily until early February 2016, but...
  • SamuelsonJohn Maynard Keynes’ General Theory Eighty Years Later
      The “Scientific” Fig Leaf for Statism and Interventionism To the economic and political detriment of the Western world and those economies beyond which have adopted its precepts, 2016 marks the eightieth anniversary of the publication of one of, if not, the most influential economics books ever penned, John Maynard Keynes’ The General Theory of Employment, Interest and Money.   The mere fact that the book is lauded by TIME magazine on the cover should give everyone...

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