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Tuesday, November 4, 2008

French Manufacturing Contracts At Record Pace In October

The French manufacturing purchasing managers index was revised down to a series low 40.6 in October, down from both the 'flash' estimate of 40.8 and September's 43.0 figure, Markit Economics said in a press release issued on Monday.

Disaggregating the figures, the output component fell to an all-time low of 37.8 from September's 41.7 level, while new orders slipped all the way to a series low of 34.9 for the month, down 2.6 points from September's 37.5 level. Purchase quantities and new export orders also saw some new record lows in October, falling to 33.7 and 38.5 respectively.



Panelists widely reported that a weak economic climate, poor business confidence and slowing consumer spending had taken their toll on demand, with incoming new orders falling at the fastest pace registered by the survey to date in October.



Weakness was evident in both the domestic and external markets, with new export orders also declining at a series-record rate.



Mirroring the trend for new work, production fell at the sharpest pace in the survey history during October. The latest drop in output was the fifth in consecutive months.



Faced with an excess of capacity relative to current new order levels, French manufacturers registered a series record reduction in backlogs of work during the latest period. Meanwhile, stocks of unsold goods continued to rise, albeit at the slowest pace in five months.



In line with lower workloads, firms made further cutbacks to staffing levels in October. The rate of job shedding accelerated to the sharpest since January 2002, with over a quarter of panelists signaling a fall in employment.



Reduced output requirements also resulted in a further sharp drop in purchasing activity at French manufacturers during October (a survey record). Stocks of raw materials and semi-manufactured goods contracted for a third straight month as a number of firms pursued inventory streamlining policies. Weaker demand for inputs allowed suppliers to speed up deliveries, with average lead times shortening slightly on the month.


Latest data signaled a further easing of inflationary pressure on both the input and output price measures during October. Costs rose only marginally and at the weakest rate for over three years, principally reflecting the recent retreat in oil and other commodity prices. Charges for finished goods increased at the slowest pace since January 2006, as faltering demand prompted many firms to hold down selling prices wherever possible.

Commenting on the Markit/CDAF France Manufacturing PMI final data, Jack Kennedy, economist at Markit, said: “France saw a further broad-based deterioration of operating conditions in the manufacturing sector during October, mirroring developments across the Eurozone. With many key variables at survey-record lows, the data signal an accelerating descent into recession at the start of Q4.”


The JP Morgan Global Manufacturing Index Plummets Too


The October contraction in France, while undoubtedly significant in its own right, is really only part of a more general global pattern. Indeed the latest JP Morgan Global PMI report really does makes for quite depressing reading.


The world manufacturing sector suffered its sharpest contraction in survey history during October, as the ongoing retrenchment of global demand and further deepening of the credit market crisis negatively impacted on the trends in output, new orders and employment. The JPMorgan Global Manufacturing PMI posted 41.0, its lowest reading since data were first compiled in January 1998 and a level below the no-change mark of 50.0 for the fifth month in a row.

Output, total new orders and new export orders all contracted at the fastest rates in the survey history in October. With the exception of India, which again bucked the global trend, all of the national manufacturing surveys posted declines in output and new orders. The impact of the downshift in global market conditions also had a far-reaching effect on international trade volumes. Although new export orders fell at a slower rate than total new business, all of the national manufacturing sectors covered by the survey (including India) saw a reduction in new export orders.



"October manufacturing PMI data reinforce the stark retrenchment that the sector is currently facing, with production, total new business and new export orders all falling at record rates. The latest Output Index reading is consistent with a fall in global IP of almost 8%. The only positive from the surveys was a decline in input prices for the first time since August 2003."
David Hensley, Director of Global Economics Coordination at JPMorgan


Economies across the Eurozone are being affected. In Italy manufacturing activity contracted at the fastest rate in at least 11 years in October according to the latest Markit/ADACI PMI survey out yesterday (Monday). The Markit Purchasing Managers Index fell to 39.7, its lowest since the series began in 1997, down from 44.4 in September. The Italian manufacturing PMI has now not been above the 50 mark separating growth from contraction since February and the latest data showed activity falling at an accelerating pace as demand shrank while jobs were shed at the fastest rate in the history of the survey.



Other recent indicators from Italy have also been far from encouraging, with October business confidence hit its lowest point since September 1993, when the economy seized up after Italy was rocketed out of the European Exchange Rate Mechanism a year earlier.



Germany's manufacturing sector contracted in October at the fastest pace in seven years as incoming orders and output experienced their sharpest declines in more than 12 years. The headline index in the Markit Purchasing Managers Index for what is Europe's biggest economy fell in October to 42.9 from 47.4 the previous month, well below the 50 mark that separates growth from contraction.





Spain's manufacturing sector continued to shrink at a record pace in October, with both output and new orders contracting and employers shedding jobs at a near record pace, according to the latest Markit Economics Purchasing Managers Index published yesterday (Monday). The Markit PMI for Spain dropped to 34.6 in October, the lowest reading registered by any eurozone economy since the series began in February 1998 and down from the already rapid 38.3 point contraction in September. On the PMI system any figure below 50.0 shows contraction while figures over 50.0 show growth. As we can see, according to this indicator Spanish manufacturing has now been weakening steadily since the start of 2006.



Eastern Europe


Hungary's manufacturing industry contracted sharply in October, with the PMI dropping 5.2 points to hit 44.7 in October - a historic low, and 0.8 points below the previous worst reading registered in October 1998, according to the latest data from the Hungarian Association of Logistics, Purchasing and Inventory Management (HALPIM).

In Poland the ABN Amro Purchasing Managers Index fell for the sixth month running to 43.7 (down from September's 44.9) a record low and well below the neutral reading of 50, according to Markit Economics yesterday. In the Czech Republic, manufacturing output contracted for the seventh month in a row, and the index hit an all-time low of 41.2, just above the revised euro zone figure of 41.1. As the Eurozone itself contracts, these economies which are heavily dependent for exports to the zone will be buffeted, especially now that forex loans for their domestic housing markets have all but dried up.




US Manufacturing

The US manufacturing PMI dropped back to 38.9 in October from 43.5 in September, indicating a significantly faster rate of decline in manufacturing when comparing October to September. It appears that US manufacturing is experiencing significant demand destruction as a result of recent events. October's reading is the lowest level for the US PMI since September 1982 when it registered 38.8 percent. On the other hand inflationary pressures are evaporating rapidly, and the Prices Index fell to 37, the lowest level since December 2001 when it registered 33.2 percent. Export orders also contracted for the first time in 70 months.


The BRICs

China's PMI dropped to lows not previously seen in October, confirming that the economy of the so-called factory of the world is now decelerating along with everyone else. Two international surveys measuring the PMI independently corroborated the evidence of a cooling Chinese industrial economy.

According to a survey complied by securities firm CLSA, China's PMI fell to 45.2 in October, its third consecutive drop, from 47.7 in September, as new orders and exports, as well as pricing power, were squeezed by the global financial crisis.


"The very sharp fall in the October PMI confirms that China is more integrated into the global economy than ever. Chinese manufacturers are seeing their order books cut, both at home and abroad, as the world economy falls into recession," said Eric Fishwick, CLSA's head of economic research, in a report released Monday. "Costs are falling but so are output prices. The coming 12 months will be difficult ones for manufacturers, China included."


The government-backed China Federation of Logistics purchasing managers' index - published on 1 November - also showed a strong contraction, falling to 44.6 in October, the lowest level since the data began in 2005, from 51.2 in September



Russian manufacturing contracted in October at the slowest pace in over two and a half years as the global financial crisis cut demand, according to the latest reading on VTB Bank Europe's Purchasing Managers' Index, which fell to 46.4 from 49.8 in September. This was the third consecutive month in which Russian industry has been contracting.





Business conditions in the Brazilian manufacturing worsened in October for the first time since June 2006. The headline seasonally adjusted Banco Real Purchasing Managers’ Index (PMI) posted 45.7, down from 50.4 in September, pointing to a sharp contraction -the fastest in the survey history in fact. The PMI was driven down by accelerated declines in output and new orders, as well as falls in employment and stocks of purchases.

Even in India the seasonally adjusted ABN Amro India Manufacturing Purchasing Managers’ Index dropped steeply in October, falling to a record low of 52.2, down from a reading of 57.3 in September suggesting another sharp deceleration in growth, even if Indian industry managed to keep expanding. The biggest fall was in the new orders sub-index, which dropped to 54.4 in October from 62.6 in September. Perhaps the saving grace in the Indian survey is that most firms said demand remained strong in domestic markets, while it had been international orders which had waned. This can also be seen from the new export orders sub-index, which contracted to 49.7 for the first time in the history of the series. That fits in with the latest data showing that Indian year on year export growth slowed to 10.4% in September. Thus the Indian expansion is still hanging on in there, by its fingernails, but it is hanging on in.

Thursday, October 23, 2008

French Business Confidence Hits Lowest Level Since December 1993

French business confidence fell to the lowest in almost 15 years as the global credit crisis worsened, threatening to deepen a likely recession in the euro region's second-largest economy.

An index of sentiment among 4,000 manufacturers declined to 88 in October from 91 the previous month, according to Insee, the Paris-based national statistics office. The reading was the lowest since December 1993.




The report also showed that manufacturers expect their prices to fall for a second month as crude oil and commodities costs retreat. Crude prices have shed more than 50 percent since a July 11 record of $147.27 a barrel, helping bring France's inflation rate to 3.3 percent in September from a 12-year high of 4 percent in July. Declining prices have cheered households.

Consumer spending on manufactured goods, which accounts for about 15 percent of the economy, unexpectedly rose 0.6 percent in September after a 0.2 percent decline in August, a separate Insee report showed. The increase in September left third-quarter spending up 0.7 percent after stagnating in April-June, Insee said.

Even allowing for the increase in consumer spending, Insee maintained its estimate that the French economy contracted 0.1 percent in the third quarter, meaning that France entered its first recession in more than 15 years on 1 April 2008.

Monday, October 13, 2008

Europe's Leaders Agree To A Common Front In Fighting The Banking Crisis

Well, Europe's leaders have finally bitten the bullet. Faced with what IMF head Dominique Strauss Kahn warned could turn into a global financial meltdown, our leaders have risen to the challenge, at least to a certain extent. The details of what has been agreed continue to remain vague, but obviously I think it is a good FIRST move. More will now almost inevitably follow, but our reluctant leaders have finally got their feet wet, and the bathing costume is on. Now it is only left for them to dive into the ocean which lies in front.

And, of course, the situation was not without its theatricals. Initially billed as a "eurozone only" meet-up, Gordon Brown was ultimately summoned, a move which was not totally essential, but since he was the only one with a real "going plan" on the table, the invitation made sense. Of course Brown himself has been relishing it all, proudly proclaining that Britain will "lead the way" out of the credit crunch, and adding in true Churchilian style that "I've seen in the cities and towns I've visited a calm, determined British spirit; that, while this is a world financial crisis that has started from America, Britain will lead the way in pulling through."

Well, we will see.

While the details at present remain vague the important point would seem to be that Europe's leaders have made a commitment not to allow any systemic bank - in Western Europe (the guarantee does not extent to Hungary which today had to turn to the IMF for support) - to go bust, and it will now be hard for them to go back on this without losing all credibility. The deposit guarantees - which may be useful in terms of reassuring the general public - would now seem to be largely redundant, since if the large banks, and their debts, are to be guaranteed, then logically the deposits themselves are safe. And while Europe itself will underwrite the systemic banks, the national governments will be able to handle the smaller ones (Spain's regional cajas etc) at local level.

So government finances will guarantee the banks, but who will guarantee the government finances? This, at this stage may seem to be an idle question, since none are under direct threat, but I think we need to be clear here, the money which will now need to be spent - and it is way too early to start trying to put precise numbers - will have to come from somewhere, and by and large this will mean the national governments issuing debt, but if we come to individual national governments like Greece or Italy - where debt to GDP ratios are already over 100% - it is not clear how much paper they can actually issue without seeing what is know as the "spread" on their bonds increasing significantly. So while it is certainly time to breath a sigh of relief, we we far from being able to whistle the all clear. And of course the real economy consequences of what has just happened are pretty serious, and the funds which will be spent propping up the banks will not be available for fiscal stimulas packages, so the bottom line is that we, in the OECD world, may well be in for one of the longest and deepest recessions since WWII.


The Package Itself

Now, as I say, the details we have to date of what has been agreed are far from clear. What is clear is that the EU collectively has agreed to guarantee new bank debt in the eurozone (and possibly elsewhere, but this point still awaits clarification, since as I say the guarantee evidently doesn't apply to Hungary, and that should give us some sort of idea about just how strained everything is at the moment). They are also committed to the use of taxpayers money to keep any systemic banks which get into distress afloat, and by implication they are prepared to pool resources to do this (maybe by injecting funds into the ECB as the UK has pledged to do for the Bank of England). This is also a very important precedent: since the European institutional structure is something of a patchwork quilt at this point, it is clearly make, mend and improvise time.

Wolfgang Munchau clearly seems to catch the spirit of the times in a long and thoughtful article in the Financial Times this morning:

"I had a better feeling about Sunday’s eurozone summit. It produced a detailed and co-ordinated national response to recapitalise the banking system, and to provide insurance to revive the inter-banking market. But as far as I could ascertain, this was still agreement on ground rules for national plans, and it is not clear how well this agreement would cover the numerous cross-border issues that have arisen. There is no doubt that, in the eurozone at least, we have come a long way since Friday. It is an okay policy response, but I wonder whether this is going far enough at a time when global investors are pondering whether to pull the big plug."


Well look Wolfgang, my favourite phrase these days is "sufficient unto the day", we have come as far as we are able to come in one weekend. There will still be next weekend, and the one after. Clearly we have not come far enough yet, but as Paul Newman discovered in a once famous film, there are only so many hard boiled eggs you can eat in one sitting.


The key measures announced at the weekend were: a pledge to guarantee until the end of 2009 bank debt issues with maturities up to five years; permission for governments to buy bank stakes; and a commitment to recapitalize what the statement called `"systemically'' critical banks in distress. The statement gave no indication of how much governments were willing to spend or the size of bank assets deemed to be at risk, and European officials refused to estimate the price tag of the measures. Some indication of the numbers involved will start to emerge today, when France, Germany, Italy and others begin to announce their national measures.

"What has been done over the last three days should provide elements of reassurance,'' Dominique Strauss-Kahn, chief of the International Monetary Fund said on French radio Europe 1 today. The worst of the financial crisis ``may be behind us.''


Often criticized for its preoccupation with inflation, the European Central Bank abruptly reversed course last week, cutting interest rates for the first time since 2003 in a move coordinated with the U.S. Federal Reserve and four other central banks. The ECB doesn't have the legal power at the moment to follow the Federal Reserve and buy commercial paper to unblock a financing tool that drives everyday commerce for many businesses, according President Jean-Claude Trichet, who also participated in yesterday's Paris meeting.


``We are looking at our entire system of guarantees and we can imagine new measures to enlarge access to our system of guarantees,'' Trichet said.


As Wolfgang Munchau points out, there is now an almost unanimous consensus among economists about the need for a recapitalisation of the banking system, and for the provision of some form of public-sector insurance for the money markets, even if there is no consensus about how exactly to do this. We should not forget, of course, that it was precisely the practice of offering guarantees - via instruments like credit default swaps - for what appeared at the outset to be investment grade lending but which later turned out to be extremely risky that has produced the current "near meltdown", and we therefore need to be extremely careful about the kind of guarantees we are offering, since what we do not want to happen is to see public finances meltdown in the future in just the way bank finances have.


What Wolfgang doesn't draw too much attention to - perhaps he is too modest - is how few of us there actually are who have been who have been arguing systematically and repeatedly for just this kind of package of measures since the very start. Wolfgang is one of a very select company here, and I, if I may be so presumptious, am another. Back on July the 18th - in a post for RGE Europe EconMonitor - I said the following (the numbers were pretty rule of thumb, but in the light of what is now coming out they don't look that far off):


So what does all this add up to? Well, to do some simple rule of thumb arithmetic, just to soak up the builders debts and handle the cedulas mess, we are talking of quantities in the region of 500 to 600 billion euros, or more than half of one years Spanish GDP. Of course, not every builder is going to go bust, and not every cedula cannot be refinanced, but the weight of all this on the Spanish banking system is going to be enormous...............So it is either inject a lot of money now - more than Spain itslelf can afford alone - or have several percentage points of GDP contraction over several years and very large price deflation - ie a rather big slump - in my very humble opinion. And it is just at this point that we hit a major structural, and hitherto I think, unforeseen problem in the eurosystem (although Marty Feldstein was scratching around in the right area from the start). The question really we need an answer to is this one: if there is to be a massive cash injection into Spain's economy, who is going to do the injecting? Spain alone will surely simply crumble under the weight, and it is evident that the problem has arisen not as the result of bad decisions on the part of the Spanish government, but as a result of institutional policies administered in Brussels and monetary policy formulated over at the ECB. And yet, the Commission and the ECB are not the United States Treasury and the Federal Reserve, no amount of talk about European countries being similar to Florida and Nebraska is going to get us out of this one: and it is going to be step up to the plate and put your money where your mouth is time soon enough.


Well, getting through to the put your money where your mouth is stage didn't take that long, now did it? Twelve weeks and two days to be exact.

My central point at this stage would be that all of this is going to have, among other things, important implications for the real economy, since it is the degree of all that leveraging which we have been busy doing which is now going to have to be reduced, and while we are all busy "deleveraging", our real economies will notice a significant drop in demand. I wouldn't like to dwell too much on the point at this stage, but this was, of course, precisely what happened in the 1930s.

Basically, one economy after another in the developed world is now going to become export dependent. If I take Spain as an example, perhaps things will be clearer. Spanish households are now in debt to the tune of around 90% of GDP. Spanish companies owe something like 120% of GDP, and the government, which is just about to start accumulating more debt, owes about 50% of GDP. Adding that up, Spain incorporated owes about 260% of GDP at the present time. But the situation is worse than that, since debts continue to mount.

Back in the good old days of Q2 2007, when Spain's economy was busy growing at a rate of about 4% per annum, corporate and household debts were increasing at a rate of about 20% per annum. 4% growth for a 20% rise in indebtedness (or an increase of about 30% in debts to GDP) doesn't seem like that good value for money when you come to think about it - and in the meantime Spain Incorporated's indebtedness to the rest of the world (via the current account deficit) was growing at a rate of 10% per annum. Fast forward to Q2 2008, and household and corporate debts were rising at a mere 10% per annum (and government debt had also started to rise, at this point at a rate of around 2% of GDP per annum, or 4% of accumulated debt), but Spain's economy had reached a virtual standstill (true it was still growing at 1% rate year on year, but quarter on quarter it was virtually stationary). So not only is this a horrible "bang for the buck" ratio, it is also totally unsustainable. Indebtedness has to be reduced, not increased, and this can be done in one of two ways, either by ramping up GDP growth (which in the present environment is out of the question in the short term) or by burning down the debt by paying (or writing) it off.

This harsh but unavoidable reality has two important implications. The first of these is that Spain is going to need external help, and the second is that while the level of indebtedness is being reduced, Spain will not get GDP growth from internal demand, and any headline GDP growth there is will need to come from exports.

And of course Spain is just one (extreme) case. There will be a whole company of others who need to make this transition (the UK, Greece, Denmark, Ireland at least, and probably virtually all of Eastern Europe - now what was that football song I used to sing back then in the old days, over there on the Spion Kop... "when you walk through a storm...").

So the question is, while a host of new countries are suddenly struggling to export, who is going to do all the importing? No mean topic this one. The only person who seems to have even the inkling of a proposal here is World Bank head Robert Zoellick, who came right out with it on Sunday: we need a new multilateral structure. The global financial crisis underscores the need for a coordinated action to build a better system, he said on Sunday. "We need to modernize multilateralism for a new global economy....We need concerted action now to ... build a better system for the future." Never better said, and never was the fact that we live in an interconnected world placed under such a stern spotlight.

And just what will this system look like? Well, the details will all need working out, but in broad brushstroke terms, my strong feeling is that we need to bring-in the large developing economies like India, Brazil, Egypt, the Philippines etc en-bloc, and create a Marshall-Plan-type structure were all those newly created developed world savings can be put to good (and safe) use in facilitating the emergence of those long suffering emerging and frontier markets, and in so doing these countries will play their part by helping provide the customers which our own "export dependent" economies will all now so badly need. But, as I say above, sufficient unto the day......

Friday, October 10, 2008

French Industry Contracted In August

French industrial production declined in August, further evidence that the second-largest economy of the 15 countries sharing the euro probably slipped into recession last quarter. Output at French factories and utilities fell 0.4 percent from a revised 1.4 percent increase in July, the Paris-based statistics office said today.




The decline in production is clear from the anove chart and looks set to worsen as demand and confidence fall on the prospect that the global credit crisis may cause a worldwide recession.

Just one indication of where we are headed may be found in the fact that France's manufacturing PMI dropped to 43.0 in September, its lowest level since December 2001. A steep decline in new orders led to substantially lower production, while employment levels contracted at fastest pace for over five years

According to the September Markit/CDAF PMI survey the performance of France's manufacturing sector worsened further in September, precipitated by a heavy drop in incoming new orders following a drop in domestic demand. The headline Purchasing Managers' Index fell from 45.8 in August to 43.0, its lowest level since December 2001.







The national statistics institute Insee has said that France likely slipped into recession in the third quarter after the economy contracted in the three months through June. Insee reported on Oct. 3 that gross domestic product probably shrank 0.1 percent in the third quarter after a contraction of 0.3 percent in the three months through June. The economy will also shrink 0.1 percent in the final three months to cut growth to 0.9 percent for the full year, the slowest pace since 1993, Insee said.

The Deflation Threat Looms As Consumer and Investment Demand Falls While Oil Turns Year on Year Negative

Oil prices plunged below $85 a barrel on Thursday, the lowest level in a year, as Opec, the oil exporting countries’ cartel, called an emergency meeting to discuss reducing its crude production to halt the collapse in prices.

This morning it is more of the same, and prices plummeted to a one-year low below $83a barrel in Asia as investor fears of a severe global economic downturn sparked a panicked sell-off of equities and crude. Light, sweet crude for November delivery was down $4.00 to $82.59 a barrel in electronic trading on the New York Mercantile Exchange by midafternoon in Singapore, the lowest since October 2007. The contract overnight fell $1.81 to settle at $86.62.

The US Department of Energy reported this week that the country’s oil demand averaged 18.66m barrels a day last week, down 8.6 per cent against the same period a year ago as the economic downturn takes its toll on oil consumption. High prices during the summer have forced US motorists to cut their mileage, and now the looming recession will mean that they don't simply increase it again as oil prices drop.

Basically this is the point I was raising only one month ago on my personal blog, as to how long we would have to wait for oil prices to turn year on year negative. So now we have the answer, they just did.



Since I am - like everyone else I imagine - basically reeling under the volume of work which all that is happening is generating, I will restrict myself here to reproducing an excellent recent piece from my colleague Claus Vistesen on the issue of global deflation risk.

The Global Economy – Is Deflation the Next Macro Story?


by Claus Vistesen: Lausanne

As the horror story of financial markets continues at full speed it may seem a rather futile endeavor to try to make sense of what is increasingly becoming senseless by the day. Yet, you hardly need to be a financial literate to see that the world of finance and banking has been changed for good. I don’t think this was neither unwarranted nor unexpected. At some point, US authorities had to let someone on the Street fail and it turned out to be Lehman (with Merril Lynch of course coming close in behind as it was snapped up by Bank of America). AIG on the other hand was saved as their role as insurer was deemed too important and systemic to merit a collapse. Then we have Wachovia, the Washington Mutual Trust etc etc …I can understand if many will have a hard time gauging the playbook through which regulatory authorities decide who lives and who dies. As we learned this week that Paulson’s plan was not passed by congress the downside now resembles something of an abyss. It will be interesting to see what happens as the bail-out plan makes its second tour to congress.


Since rumors began of the peril of sub prime mortgages and credit crunch became the new buzz word in the financial vocabulary we have seen some quite eventful weeks not to mention days in which volatility has gone far beyond what any respectable VAR model would be able to foresee. Still the past two weeks must clearly take pole position so far. The numbers flying around and the movement in key market parameters have been extraordinary. That equities were down should not surprise us as we have seen it before this year when Wall Street’s office buildings have been re-shuffled. However, this time it was perhaps a bit different as yield on treasuries fell to almost 0% at one point as investors quit anything with but a faint smell of risky assets. Another specific and most unwelcome side effect of this was the corresponding seizure in credit and liquidity markets which followed. At some point, the cost of borrowing money in the interbank market almost doubled taking the LIBOR rate close to 650 basis points (now running at about 550 bps on the back of the échec of the Paulson plan) as well as the three month spread of LIBOR over the treasury climbed to over 300 basis points. These swings tell an important cautionary tale of the seriousness of this crisis. Especially, the lack of confidence and subsequent seizure of the short term financing market is one of the most tangible and severe effect from this crisis.


Meanwhile and beyond the immediate eye of the storm on Wall Street, Europe is entering its own house of pain as cracks in the banking sector begin to steadily emerge. Add to this that the macro environment is pointing towards a steep Eurozone wide recession and you have the ingredients for a very serious downturn on the European continent. I still hold that the lack of real response on the rate front will not only hurt the ECB’s credibility, but also worsen the inevitable slump.


In emerging market land, things are not looking brighter with the anticipated safe haven flows drastically eroding valuations of asset markets in these economies. Russia seems to be suffering more than most from the recent retrenchment of risk aversion. Now, before people let their thoughts wander back to 1998 and LCTM’s spectacular collapse betting on the wrong side of the Russian debt binge I don’t think that Russia stands before an imminent default. Around $700 billion worth of reserves in the form of foreign exchange and national investment vehicles will keep Russia from any kind of immediate default. However, with trading in the USD denominated RTS index halted twice during the last two weeks due the continuation of outflows from foreign investors, it is difficult to ask the subtle question of whether this time, it might not be a little bit more serious than mere tremors [1] .


On the back of yesterday’s news that congress rejected the bailout plan knitted together by Paulson and Bernanke, the MSCI World Index of 23 developed markets dived 6.8 percent, which was the sharpest decline in the measure's 38-year history according to Bloomberg. In Brazil trading was suspended after the Bovespa fell more than 10% and in India and aforementioned Russia equities were equally pummeled. Stephen Jen and his colleagues from Morgan Stanley (who itself is fighting for survival) have some interesting points on capital flows to emerging markets in the latest edition of the GEF.


What happens next is of course anybody’s guess, but below I would like to point to one plausible and tangible outcome of the wheels that were set in motion back in august 2007 when BNP Paribas announced subprime related losses and thus took the credit crisis to global levels.

Deflation as the Next Macro Story?


The macro themes which have characterized the past year’s eventful period have been fickle. As the Fed decided to let interest rates fall in the end of 2007 decoupling was the name of the game as gold and crude oil reached new highs at one and the same time as the USD was pummeled. However, as it became clear that the US was merely the proverbial canary in the coal mine for a much wider global slowdown the sentiment changed. One main question in this regard was always whether the obvious bout of stagflation, at some point, would turn into deflation; a question I also mused on a couple of months back. As per usual with these things there are arguments for and against. The strongest impediment to a worldwide deflationary slump is the continuing pressure from growth in emerging economies. To be sure, these economies are also going to be run down a notch, but the underlying momentum and the lack of global supply slack in terms of energy resources seem certain to keep headline inflation high as we move forward. [2] However, the crucial point here is exactly that the double barril of imported cost-push inflation at the same time as the economy is contracting may lead to a negative feedback loop that can provoke deflation. Consequently, when I look at the current deterioration in real economic activity across OECD as well as the ongoing tensions in credit markets I believe that deflation is now a fair and probable call in the context of key regions and countries.


Essentially, it is difficult not to notice that something has changed with the recent stream of incoming macro data for Q2 and Q3. In Europe, the Eurozone and key parts of Eastern Europe are likely to be in a recession and also Japan seems to have hit a brick wall. Meanwhile emerging economies also seem to be slowing sharply although recessions in that part of the economic edifice are very unlikely.


All this almost looks like de-coupling in reverse, but the US is unlikely have to have seen the worst yet. Re-coupling does not only work one way and just as the US has enjoyed a windfall from exports in H01 2008 so will the rapid deterioration of the rest of the world feed into US growth rates. It is important to note here that the US’ capacity for domestically induced growth is next to none with a consumer saddled with debt and a financial system in shambles. The US has not yet posted growth rates akin to a recession [3] but that will most likely happen as we come closer to 2009 (Q4 08 and Q1 09 would be my guess, but do go have a look at MS’s Berner and Weiseman for a one stop look at the US economy). In the briefest of versions this small view across the global economic edifice indicates that activity is coming down sharply across the board. In many ways, the effects on the real economy are only about to emerge as we move forward from here and this will be accelerated by the ongoing tensions in financial markets.


However, a sharp de-accelerations in activity need not lead to deflation and even if it does it may, according to some, be the only meaningful end result as well as means for correction for some countries. This begs the question of why am I invoking the deflation ghost and, more pertinently, what kind of deflation I am talking about?


In many ways, the current decline in real activity makes perfect sense as it comes on the back of an extraordinary run in terms of the economic cycle. Some are even talking about the end of one big mega-cycle with some debate on when this cycle is supposed to have started. I will leave this question neatly aside for now and merely conclude that with the added flavor of credit market turmoil and the velocity of the cycle that was (and is now gone), this present slowdown and crisis seem, in many ways, to be quite different than in previous global downturns.


To state that things are different however is scarcely enough to determine whether some parts of the global economy are headed for a sustained deflationary spiral (save perhaps for Japan, but I will touch on that below). However, I would still submit the claim this is actually a real risk at this point. In the following I will argue why.


Stating the Obvious


One key element in my call is a statement of the blatantly obvious. The credit crunch is consequently not just a figment of imagination but a real phenomenon with subsequent real and measurable effects, and what we really ought to be asking ourselves is what it actually means? An almost endless amount of commentary has been devoted to the answer of this question, but I still think that we should try to have a closer look for the sake of argument.


If we begin from the point of view of asset prices, I believe most people can agree that the world as a whole has now entered a prolonged period of asset deflation in key sectors. If we look at an asset such as real estate and housing it seems clear that a substantial amount of deflation lies ahead for many economies before previous imbalances can be corrected. Given the strong and accentuated wealth effect from real estate appreciation due to the possibility for equity withdrawal this is one of the main ingredients in the current crisis. In fact, if we peer across most economies who are now facing serious corrections real estate bubbles was an integrable part of past exuberance.


As regards financial assets we also seem to be in for a period of deflation even though the volatility of such movements makes this an entirely different beast. However, it is interesting in this respect to observe that whole classes of financial assets that were hitherto used to prop up many a financial institution’s balance sheet have now been completely evaporated. This is true not least for many credit products as well as it seem that many debt products backed by mortgages are heading for oblivion (the fascinating tale of the Spanish Cedulas here is a good place to start). [4] In this way, it is perhaps not so much a question of deflation in financial assets but more so about a process by which the asset base is narrowed. I do think this is a critical point to take aboard. This is not just about wealth destruction because risky assets fall in value; it is also about the destruction of entire asset classes and financial business models. If we add to this the general tightening of credit and liquidity provisions we end up with a massive and abrupt shrinkage of the global credit base.


Many would see this as a good and indeed quite necessary byproduct of the incoming slowdown. The past economic cycle was one of easy money and an unprecedented expansion of the credit and liquidity base through, not only through leverage, but also through simple product innovation in the context of financial products. I agree with this narrative, but there is more to this story than meets the eye.


What Does it Mean in a Macroeconomic Context Then?


Two things are important here I think.


One the one hand, economies that have been living well on foreign credit will now have to revert to a different or less extreme version of their previous growth path. Countries such as Spain, the USA, Australia, New Zealand, and many emerging economies in Eastern Europe are amongst the major candidates here. In general, it is clear that across the entire global economic edifice external deficit economies will need to tighten their belts due to the widespread global slowdown.
On the other hand, we also need to look at the credit side since this is not only a story about excessive exuberance on the part of debtor nations. It is also very much about the creditor economies and how they have been living high on foreign economies’ willingness and capacity to absorb the inflows. Now that the capacity for credit absorption is declining, so will creditor nations loose momentum as they are no longer able to tap foreign debtors to the same degree as before.


It is especially within this context that I see the potential for deflation. In particular, I would cut a lateral line through those creditor and debtor nations with distinct demographic profiles in the form of low fertility rates and subsequent high and rapidly rising median ages.


On the credit side Japan and Germany stand out as obvious candidates [5] . We can already see from the data how, absent support from external demand and asset income, headline GDP figures are tanking. Given the persistently depressed situation with respect to domestic demand and the deteriorating global credit conditions, there is a real chance that whatever endogenously generated trend growth path these economies can muster, the ensuing price trend could very well be one of deflation in core as well as key asset prices.


Turning to the deficit nations many commentators have noted how the US may be entering a Japan type of lost decade. I still think this is very unlikely; the amount of liquidity being pumped into the system as well as the much more stable demographic profile will prevent the US from falling under the yoke Japan did in the 1990s. However, I need to concede that the continuation of negative real interest rates at one at the same time as the public debt is being used to funnel corporate’s and household’s liabilities are not helping the US debt position. Without a shred of doubt, the US economy is hit much harder than was initially anticipated and at this point in time it remains to be seen whether the aggressive regulatory arrangements will have the wanted effect. In a more fundamental light I think it is quite obvious that the role of the US economy will change for good which need not be a bad thing but will take some adjustment of mindsets.
Meanwhile, I do see considerable potential for deflationary corrections in Spain, Italy and key parts of Eastern Europe. My rationale is that these economies perhaps stand before the most severe adjustment of all. In Spain the structural break is obvious. 6 years worth of housing booms, deficit spending and high growth driven by massive immigration and negative real interest rates will now need to be corrected. The rub here is however that membership of the Eurozone and a fixed exchange rate make wage deflation almost a certainty if a correction is to be achieved. Coupled with the unraveling of the housing market the downward momentum is extreme, and it should never escape our attention that before 2000 Spain was set to become to oldest society on earth. If she is not able to keep those immigrants the ensuing negative shock to the labour market will be quite severe.


In principal the same argument can be applied to Eastern Europe where the recent period of violent inflation may very well be the initial stages to a slump where wage deflation is the only possible way to correct in light of fixed exchange rate regimes. The greatest threat is that the slowdown becomes so severe that emigration intensifies further. This would have quite important consequences for these economies’ already distorted demographic profiles. One obvious question is the extent to which a prolonged period of wage and asset price deflation would be politically palatable. I would seriously doubt this and then we are back in the viper’s nest where the potential for an abrupt rupture of the Euro peg as well as a severe funding crisis à la Asia 1997.


As for Italy, it has long been my standing position that Italy, at some point, could tumble into a Japan like deflation trap. Whether it will happen during the turn of the current cycle is debatable, but the severity of the slowdown certainly suggests that the possibility is a real one. In passing, I would like to note that the issue of Spain and Italy (and quite possibly other economies in the Eurozone too) will not make life any easier at the ECB and in Bruxelles. The point here is simply that the ECB would not, under the current regime, be able to administer some local version of the Japan ZIRP in Italy and/or Spain. The consequences of this inability may unfortunately now become clear for everybody.


The main manifestation of the potential deflationary correction will be through wage deflation (especially in real terms) as well as a persistent gap between strong headline inflation and core prices. This is an undercurrent in the data I have been highlighting persistently in my analyses. The key point to latch on to is the inability of some economies to muster domestic demand which in turn will tend to have a deflationary effect; especially in the context of an incoming slowdown as we are seeing now.


Much Ado about Nothing?


If you have made it this far, you might ask with some legitimacy whether in fact I am not making much ado about nothing. After all, the means for correction here are pretty standard econ 1-0-1 type processes and deflation need not be an unwelcome thing as long as there is light at the end of the tunnel.


My main thesis however is that many of the economies which now face potential deflationary corrections do so principally because of their demographic profiles. If past experience is anything to go by this should raise more than a few eyebrows since we know how difficult it is to escape from deflation once you are caught in the web. This is the ultimate lesson to draw from Japan’s so-called lost decade. It was never exclusively about incompetent Japanese policy makers. Rather, the crucial question to ask is why Japan did not manage to muster sufficient domestic demand to recover and why Japan is now completely dependent on foreign demand and asset income to attain respectable [6] growth rates.


I believe that the answer to this question resides within the sphere of demographics and it is in this light I am worried that the global economy will see a number of economies join Japan (Germany already has I would argue) on the back of the current crisis.


If this turns out to be true it also highlights a number of crucial questions. The first is simply that if many hitherto net credit absorbers are now to become to net credit suppliers where is the extra global capacity going to come from? From my chair, it is as if everybody is talking about the need for the US to export its way out of trouble, but who the heck are going to take up the slack? Moreover, if I am right in the sense that many former deficit nations have suffered a structural break the re-shuffling of the global economy will not lead to a more balanced flow of funds, but rather the opposite. This would especially be the case if key emerging economies persist on maintaining an open life support to whatever is left of the Bretton Woods II system.
Another way to narrate this predicament would be to ask who will do the saving and, equally as important, who will provide yield for the accumulated stock of capital?


As for the first part of the question one is tempted to say everybody. External deficit nations will now have to work towards grinding down the debt and external surplus economies cannot, for the most part, do much but to cling on to the increasingly smaller batch of growing markets. I am still skeptical here that the unwinding of the Bretton Woods II à la traditionelle with China and Petroexporter et al. holds much promise to bring rebalancing. As for the part of the world actually able to act as buffers (e.g. India, Brazil, Turkey etc), they are clinging on with their nails, not only to prevent a rout on their capital markets as money pours out, but equally so in the context of actually absorbing the flows once the money start coming in again, because trust me, it will. The key point in terms of global capital flows is that the margins are simply getting smaller in terms of living off of one’s accumulated savings (assuming of course that you do not dissave) and that this will hurt economies in the old end of the demographic spectrum in particular.


In conclusion, one of the main forward looking macro themes I am watching at the moment is the potential for deflation. I would especially ascribe this risk to be high in economies in need of serious competitive and debt reducing corrections as well as in economies unable to muster sufficient domestic demand to stay above water when external demand falters. In my rudimentary analysis I use demographics as a yardstick and as such my claim is quite easily falsifiable. The only thing we need to do then is to watch and see what happens.


[1] My colleague Edward Hugh does just that, and I recommend you to go have a look.
[2] Even if it may turn negative y-o-y in 2008 on the back of the accelerated slowdown.
[3] Although most would agree that the US is now firmly in a recession based on the commotion in financial markets and the deterioration of the job market.
[4] The very aggressive expansion of central banks’ balance sheet and the de-facto ability of financial institutions to offload assets on to ”public” books will be an interesting case to gauge for economic policy makers and historians alike.
[5] Japan has obviously never actually escaped deflation.
[6] Respectable here can mean many things, but one simple derivative is the extent to which Japan need a certain degree of headline growth in order to keep on servicing its liabilities.

Sunday, October 5, 2008

The French Economy Glides Elegantly Into Recession

France's economy continues to slow by the month. Output is down, domestic demand is delining, exports are struggling, and unemployment is up. The tumultuous events of late August and early September in the global financial markets are now evidently making their presence steadily felt on the real economy. And new factor emerged in recent days, with the global banking and financial crisis arriving right on France's doorstep. With no effective remedy whatsoever being offered from Euope's core leaders, the worst is, most definitely, still to come. The banking problems of recent days now cast a long, dark and awesome shadow over Europe's future, and in particular over the future of the Eurozone, since the absence of the political will and the political institutions to make the management of economic problems which are in effect part and parcel of the decision to have a common currency, leaves all of us vulnerable, and rather perilously exposed.


The French Economy Enters Recession


France's national statistics office INSEE reported last week that the French economy contracted in Q3 2008. If this preliminary estimate is confirmed then I am left asking myself which of the big four eurozone economies could possibly be expected to have expanded in the July to September period. Certainly not the Spanish one, which while not technically in recession yet (you need to consecutive quarters of negative growth to classify as being in recession) can hardly have expanded. The German economy almost certainly contracted, and while the Italian one could sneak a surprise "horses-nose" expansion (given the low level it had reached in the 2nd quarter) I think it is unlikely. So here we go - recession in the eurozone.

France's gross domestic product probably shrank by 0.1 percent in the third quarter after a contraction of 0.3 percent in the three months through June, according to the latest Insee estimate. The economy is also likely to shrink 0.1 percent in the final three months to cut growth to 0.9 percent for the full year, the slowest pace since 1993, Insee added.


September Global Manufacturing PMI Shows Sharp Contraction


France's manufacturing sector shrank at its fastest pace in at least 7 years in September as output, new orders and employment all fell at a record rate, according to the Markit Economics Purchasing Managers Index out last Wednesday. This result is hardly surprising, since September seems to have been the ultimate "mensis horribilis" for industrial output internationally, with global manufacturing activity contracting for the fourth consecutive month, and output falling to its weakest level in over seven years according to the JP Morgan Global Manufacturing PMI, which at 44.2 hit its strongest rate of contraction since November 2001, down from 48.6 in August (Please see the end of this post for some information about countries included and the JP Morgan methodology).


According to the JP Morgan report the retrenchment of the manufacturing sector mainly reflected marked deteriorations in the trends for production, new orders and employment. The declines in output and new work received were the second most severe in the survey history, while staffing levels fell at the fastest pace for over six-and-a-half years. The Global Manufacturing Output Index registered 42.7 in September, well below the 48.5 posted for August.

The sharpest decline in production was recorded for Spain, followed by the US, Japan and then the UK. Although the Eurozone Output Index sank to its second-lowest reading in the survey history, it was above the global average for the first time in four months. Within the euro area, France and Spain saw output fall at survey record rates, while in Italy and Ireland the contractions were the second and third most marked in their respective series. Germany, which until recently was the main growth engine of the Eurozone, saw production fall for the second month running and to the greatest extent for six years. Manufacturing activity in Japan fell to the lowest in over 6- years with the Nomura/JMMA Japan Purchasing Managers Index declining to a seasonally adjusted 44.3 in September from 46.9 in August.

At 40.8 in September, the Global Manufacturing New Orders Index posted a reading well below the neutral 50.0 mark. JP Morgan noted that the trends in new work received were especially weak in Spain, the UK, France and the US, with the all bar the latter seeing new orders fall at a series record pace (for the US it was the strongest drop since January 2001). The downturn of the sector led to further job losses in September, with the rate of reduction in employment the fastest since February 2002. Conditions in the Spanish, the UK and the US manufacturing labour markets were especially weak.

So basically this is where we get to learn what a global credit crunch means in terms of output and economic growth.




French Manufacturing Contracts Rapidly in September

France's manufacturing PMI dropped to 43.0 in September, its lowest level since December 2001. A steep decline in new orders led to substantially lower production, while employment levels contracted at fastest pace for over five years

According to the September Markit/CDAF PMI survey the performance of France's manufacturing sector worsened further in September, precipitated by a heavy drop in incoming new orders following a drop in domestic demand. The headline Purchasing Managers' Index fell from 45.8 in August to 43.0, its lowest level since December 2001.



In a continuation of the trend seen throughout Q3, weakness was primarily the result of depressed demand conditions with new orders declining at a series-record pace in September. Panellists attributed the lack of incoming new work to the current difficult economic climate and an associated lack of confidence amongst consumers and businesses. Faltering demand was again particularly pronounced in the domestic market; although export orders fell at the sharpest rate in over five years, the decline was far less marked than that recorded for total new orders.

According to the Markit report French manufacturers lowered their production levels during September as a response to the latest contraction in new work. Output fell for the fourth consecutive month, and at the fastest rate since the start of the survey in April 1998. Firms were able to make further significant inroads into their outstanding business, with backlogs depleted at a series-record pace. The weak sales trend was also reflected in stocks of finished goods, which expanded at the strongest rate registered by the survey to date.

Most significantly there was survey-record drop in new orders. The seasonally adjusted New Orders Index posted 37.5, down from 41.3 in August and indicative of a marked rate of decline. Anecdotal evidence linked the weakness of new orders to low consumer and business confidence, depressed conditions in the construction sector and global economic uncertainty. New export orders fell for a seventh month in succession during September. At 45.0, down from 49.6 in August, the seasonally adjusted New Export

Orders Index signalled that the latest drop was the sharpest since June 2003. Around 31% of panellists reported lower new foreign orders during the latest month, which they attributed to weak demand in key export markets such as North America, Europe and Asia.

There was evidence of easing inflationary pressures from both the input and output price measures in September. Average costs increased at the slowest rate for ten months, allowing firms to raise their own charges at the weakest pace since last October in an attempt to mitigate softer demand.



In a sign of pessimism over the prospects of a revival in demand during the near future, manufacturers made further cutbacks to staffing levels in September. Furthermore, the latest drop in employment in the sector was the sharpest since July 2003. In line with lower production requirements, French manufacturers made further cutbacks to staffing levels during September. The seasonally adjusted Employment Index remained below the 50.0 no-change threshold for a fifth straight month and fell from 46.7 to 44.6, its lowest level since July 2003 and indicative of a sharp rate of hiring.



cost inflation moderated to a ten-month low, as indicated by the seasonally adjusted Input Prices Index falling sharply from 74.5 to 63.7. Producers of consumer goods signalled the steepest rise in costs.

SUPPLIERS' DELIVERY TIMES

Sharply reduced demand for inputs alleviated pressure on suppliers during

September and, consequently, average lead-times shortened for the first time in five years (albeit only marginally). This was signalled by the seasonally adjusted Suppliers' Delivery Times Index recording 50.2, up from 47.3 in the previous month.




France's Services Setor Rebounds Slightly In September

French services sector activity remained broadly unchanged in September following falls in the previous two months, that is we are still below the June 2008 level of services output. New business expanded slightly for the first time in four months, albeit the change was only fractional

After two months of contraction, activity in the French service sector moved broadly sideways in September. Output was supported by a very slight rise in incoming new work, in part reflecting discounting strategies as firms competed to win business amid a muted demand environment. Meanwhile, cost inflation continued to moderate from recent highs.

The seasonally adjusted Markit/CDAF Business Activity Index stood at 50.1 in September, up from 48.0 in the previous month, a level indicative of almost unmeasurable growth in the sector.



The volume of incoming new business received by French service providers was broadly unchanged in September, arresting a three-month period of decline. However, anecdotal evidence suggested that trading conditions remained difficult in light of current economic difficulties and subdued consumer and business confidence.

In a number of cases, new order gains were attributed by panellists to discounting strategies. Average charges in the French service sector fell marginally for the first time since April 2004, as companies attempted to stimulate demand through promotions and price cuts.

Lower output prices were in part facilitated by a further easing of input price inflation in September. Costs rose at the slowest rate in twelve months, and at a pace broadly in line with the long-run average for the series. Panel members mainly attributed the weaker increase in costs to the recent fall in global oil prices.

Outstanding business in the French service sector increased for the first time in four months during September. However, growth of backlogs was only marginal and did not prevent companies from making further cutbacks to staffing levels. Employment declined for a fourth successive month, although the latest reduction in workforce numbers was only slight.

Optimism in the French service sector edged up to its highest for three months in September. Panellists anticipated that business expansion programmes and the development of new services would support higher activity over the coming year. However, firms expected that growth would likely be constrained by ongoing weak economic conditions, and the overall degree of confidence was the third-lowest in the survey history.


JP Morgan Global Manufacturing PMI Methodology


The Global Report on Manufacturing is compiled by Markit Economics based on the results of surveys covering over 7,500 purchasing executives in 26 countries. Together these countries account for an estimated 83% of global manufacturing output. Questions are asked about real events and are not opinion based. Data are presented in the form of diffusion indices, where an index reading above 50.0 indicates an increase in the variable since the previous month and below 50.0 a decrease.

The countries included are listed below by size of global GDP share, and the figures in brackets are the % og global GDP in each case (World Bank Data).

United States (30.5), Eurozone (18.7), Japan (13.9), Germany (5.6), China (4.9),United Kingdom (4.5), France (4.0), Italy (3.2), Spain(1.9), Brazil (1.9),India (1.7), Australia (1.3), Netherlands (1.1), Russia (0.9), Switzerland (0.7), Turkey (0.7), Austria (0.6), Poland (0.5), Denmark (0.5), South Africa (0.4), Greece (0.4), Israel (0.3), Ireland (0.3), Singapore (0.3), Czech Republic (0.2), New Zealand (0.2), Hungary 0.2.

Friday, October 3, 2008

INSEE Signal Recession In The French Economy

Well, according to the latest estimate from France's national statistics office INSEE, the French economy contracted in Q3 2008, if that is the case I am left asking myself which of the big four eurozone economies could possibly be expected to have expanded in the July to September period. Certainly not the Spanish one, which while not technically in recession yet (you need to consecutive quarters of negative growth to classify as being in recession) can hardly have expanded. The German economy almost certainly contracted, and while the Italian one could sneak a surprise "horses-nose" expansion (given the low level it had reached in the 2nd quarter) I think it is unlikely. So here we go - recession in the eurozone.

France's gross domestic product probably shrank by 0.1 percent in the third quarter after a contraction of 0.3 percent in the three months through June, according to the latest Insee estimate. The economy is also likely to shrink 0.1 percent in the final three months to cut growth to 0.9 percent for the full year, the slowest pace since 1993, Insee added.

``The French economy continues to be hurt,'' Insee's chief forecaster Eric Dubois said at a briefing in Paris yesterday. The current credit crisis ``is an important risk,'' he said, as well as oil prices, ``which have become more volatile.''

French President Nicolas Sarkozy introduced 8 billion euros ($11 billion) of tax cuts this year but this has evidently not been sufficient to underpin French growth as surging commodities prices have pushed inflation higher at the same time as global demand has cooled. Sarkozy this week took additional steps in an attempt to support the economy by allowing the government to buy more than 30,000 unfinished homes at a discount in order to prop up the slumping real estate market. French housing starts were down year on year by 13 percent to 394,726 in the June-August period and the weaker demand has begun to drive down the price of existing homes. Sarkozy is also introducing measures to boost loans to small and medium-sized companies by 22 billion euros ($30.4 billion) by the end of 2009, in a attempt to offset the impact of the credit crunch.

INSEE suggest consumer spending will stagnate in the second half of the year while unemployment rises - to 7.8 percent by the end of the year, up from 7.6 percent in the second quarter, according to their forecast. Corporate investment fell 0.2 percent in the third quarter and may well drop a further 0.1 percent in the last three months of the year. Exports rose 0.1 percent but may drop back by 0.2 percent in Q4, while imports were probably down 0.1 percent in Q3 (reflecting the weakening internal consumption) but could rebound and increase at an equivalent pace in the fourth quarter.

Friday, September 26, 2008

French Consumer Confidence Improves Slightly In September

French consumer confidence rose for the first time in more than a year in September as falling fuel prices left people with more to spend on food and clothing. The monthly consumer confidence servey carried out by the national statistics office came in with a reading of minus 44, up from a revised record-low of minus 47 in July, the last month for which the survey was held.




The price of oil has now fallen by around a third from its record in July. Still, crude remains at more than $100 a barrel and is 33 percent higher than a year ago, while the continuing crisis in global financial markets may act as a constraint on consumers' ability and willingness to spend in coming months.

Thus despite the uptick in confidence French consumer spending on manufactured goods actually fell in August. Household spending on manufactured goods, which accounts for about 15 percent of the French economy, fell 0.3 percent from July, when it rose 0.4 percent, according to data from Insee. From a year earlier, spending declined 0.1 percent.

The French economy shrank 0.3 percent in the second quarter, the first contraction in more than five years, according to the detailed figures released by INSEE today. Household spending fell an annual 0.1 percent, while exports declined 1.7 percent, from an increase of 2.6 percent in the first three months.

Wednesday, September 24, 2008

French Business Confidence Down Again In September

French business confidence fell to its lowest level in five years in September. An index of sentiment among 4,000 manufacturers fell to 92 from a revised 97 in July, according to the French national statistics office INSEE. That was the lowest reading since August 2003.



The sub-index measuring sentiment on the economic outlook fell to minus 42 from a revised minus 33 in July; the outlook for orders dropped to minus 24 from a revised minus 19; and the foreign orders component slipped to minus 27 from a revised minus 16. The measure of French executives' outlook for their own production fell from a revised minus 1 to minus 10.

Europe's manufacturing and service industries contracted at the fastest pace in almost seven years in September according to the flash reading on the composite purchasing managers index. French manufacturing contracted at the fastest rate in several years, while French services showed a very slight expansion. The French economy contracted for the first time in more than five years in the second quarter, shrinking by 0.3 percent from the first three months. Thus the situation must be touch and go whether we see a technical recession in the third quarter, or whether the French economy just manages to scrape a slight expansion by a hair.

Tuesday, September 23, 2008

French Consumer Spending Falls In August

French consumer spending on manufactured goods fell in August after the euro region's second-largest economy shrank and shed jobs. Household spending on manufactured goods, which accounts for about 15 percent of the French economy, fell 0.3 percent from July, when it rose 0.4 percent, according to data from Insee, the national statistics office, earlier today. From a year earlier, spending declined 0.1 percent, the first year-on-year drop since September 1997.

Spending on cars in France slipped 1 percent in August from the previous month, and purchases of clothes and leather goods dropped 1.9 percent, compared with a 0.1 percent decrease in July, Insee said today. Spending on home appliances and furniture rose 0.6 percent.

Eurozone Flash PMI's For Manufacturing And Services Indicate Continuing Contraction

Europe's manufacturing and service industries contracted in September at the fastest pace in nearly seven years as continuing problems in credit-markets slowed lending and borrowing and companies scaled back production in response to slowing orders. The Royal Bank of Scotland Group composite purchasing managers index dropped to 47 - down from 48.2 in August - and the lowest since November 2001.

While these are only initial flash estimates, and we will need to wait to see the detailed confirmation on October 1st, this extended contraction in both manufacturing and services industries does suggest that it is now touch-and-go whether the eurozone economy will contract for a second consecutive quarter in Q3 2008, making for the first collective recession since the single currency was introduced.

The manufacturing index fell to 45.3 this month, down from 47.6 in August, while the services index fell to 48.2 from 48.5.

French Manufacturing Contracts Drastically, While Services Unexpectedly Expand


The French manufacturing PMI continued to indicate contraction in September, with the reading falling to 43.6, a much sharper rate of decline than the 45.8 registerd in August. This is the fastest pace of decline in manufacturing production since October 2001, with output being dragged down by very weak domestic demand, which prompted a huge decline in new orders, according to the statement by Markit Economics.




The service sector, on the other hand, showed unexpected strength, rising to 50.4 in September from 48.0 in August.


Thursday, September 4, 2008

France's unemployment rate held steady in the second quarter of 2008 following 15 months of continuous declines. The jobless rate stayed at 7.6 percent in the April-June period, according to data from INSEE the French statistics office. Excluding France's overseas territories, the unemployment rate was 7.2 percent, a 25-year low.

Companies are evidently becoming more reluctant to hire as consumer spending wanes, while a  46 percent rise in oil prices in the past year adds to costs. Gross domestic product fell 0.3 percent in the second quarter, and Prime Minister Francois Fillon now sees the economy growing about 1 percent this year, significantly down from a previous forecast of  2 percent.


Company investment, consumer spending and exports all declined in the euro region in the second quarter, pushing the member state economies closer to a recession. The 0.2 percent economic contraction in the three months through June was the first since the introduction of the euro almost a decade ago. Companies are also facing tighter credit conditions as the European Central Bank keeps interest rates at a seven-year high and banks remain reluctant to lend in the wake of the U.S. subprime mortgage market collapse.

In fact the French economy lost jobs for the first time in more than four years in the second quarter. The deterioration in the labor market comes at a time when inflation is accelerating at the fastest pace in 12 years, weakening consumer spending and aggravating the slowdown.

Insee also revised up the unemployment rate for the first quarter to 7.6 percent from the 7.5 percent initially reported. 

Monday, September 1, 2008

French Manufacturing Contracts Again In August

Manufacturing activity in the euro zone contracted for the third straight month in August, as German firms reported shrinking output for the first time in three years. The PMI for the euro zone's factory sector rebounded slightly and  rose to 47.6 in August from 47.4 in July, data from research group Markit Economics showed on Monday, beating expectations for a rise to 47.5. But the measure still indicated that output is shrinking (if a little more slowly)  since a reading above 50 signals growth, while a level below 50 signals contraction.



The data showed that Germany and Spain recorded very sharp decreases in export orders, while employment in the currency bloc fell for the third straight month. Price pressures eased somewhat, but remained at high levels, underlining the European Central Bank's dilemma as it tries to balance high inflation levels and slowing growth across the region. Germany's PMI was revised down to 49.7 in August after 50.9 in July - marking the first contraction since the third quarter of 2005.

The French PMI fell to 45.8 in August from 47.1 a month earlier, beating expectations for a drop to 45.1.



Italy's PMI rose to 47.1 compared with 45.3 a month earlier. Spain's manufacturing PMI hit 42.4 in August compared with 39.2 in July. Manufacturing activity edged up in Spain and Ireland but remained at very low levels, with Spain's reading the third lowest in the survey's 10-year history. The euro-zone manufacturing PMI is based on data from Germany, France, Italy, Spain, Ireland, Austria, Greece and the Netherlands, which account for about 92% of the bloc's manufacturing activity

Thursday, August 21, 2008

Eurozone Recession On the Horizon?

Is the first zone wide recession in the short history of the eurozone about to be registered? Certainly the flash PMI estimates for August give the impression that it might. The Royal Bank of Scotland Group Plc's composite index came in at 48 after 47.8 reading in July. Any result under 50 indicates contraction. Unfortunately we only get flash estimate breakdowns for France and Germany, but it isn't that difficult to deduce from the composite number that Spain and Italy continue to contract - although given that the composite rebounded slightly, while both services and manufacturing slowed in Germany, and in France manufacturing contracted more sharply in July while the contraction eased a bit in services, then it may be that Spain and Italy weren't contracting quite so strongly in August as they were in July.

Germany


The German manufacturing index fell to 49.9 in August, its lowest level in three years, after slipping back index to 50.9 in July.





Helping to push down the manufacturing indicator was the export component, which fell to its lowest level since June 2003, according to the report from Markit Economics.

The services PMI reading was not much better, falling to 50.6 in August from 52.1 in June. As things stand German services are riding just shy of contraction if the flash reading is borne out in the final result.




In its report, Markit Economics noted that the business expectations sub-index for Germany had slipped to the lowest level since November 2002.

France

Activity in France's manufacturing sector contracted at the sharpest rate in over six years in August, with a contraction of 45.1 being registered, down on July's 47.1 and the lowest level since December 2001.



The service index came in at 48.5, above July's 47.5 but still only its second time in negative territory since mid-2003. New business logged by service firms shrank at its fastest pace since the data was first collected in May 1998.




"If you extrapolate these figures through to the third quarter you're probably looking at stagnation of GDP (gross domestic product)... This is not a harbinger of imminent upturn," said Chris Williamson at data compiler Markit Economics. "Nothing points to a fundamental turnaround... I think there's been a spillover effect from Italy, Spain and now Germany, and France has followed suit."
So Is It Recession, and Will We See Rate Cuts From the ECB


Gross domestic product fell 0.2 percent in the second quarter from the first, when it grew 0.7 percent, according to the data released ny Eurostat (the European Union's statistics offic) last week, and it now seems clear that this contraction may well pass over into the third quarter. In fact Germany's Economy Ministry said only yesterday that the economic outlook in Germany has worsened even beyond the second quarter, when gross domestic product shrank for the first time in four years.

European consumers are not getting much relief from falling oil prices either, since while oil prices have fallen 20 percent from a record $147.27 a barrel on July 11 the euro has dropped 7 percent ($1.4780 today) from its peak of $1.6038 hit on July 15, taking a lot of the edge off the drop. The fall in the euro will however make exporting outside the zone easier, the difficulty is that the demand for exports is slowing generally as the global economy slows.

The European Central Bank, which raised its benchmark rate by a quarter point to 4.25 percent in July, currently predicts growth will slow to about 1.8 percent this year from 2.7 percent in 2007, but today's PMI data would seem to confirm that the ECB's growth projections are no longer realistic and that the time to move over into rate cuts mode is fast approaching.

Thursday, August 14, 2008

French GDP Contracts in Q2 2008

The French economy contracted for the first time in more than five years in the second quarter as exports declined and companies cut spending. Gross domestic product in what is the euro-region's second-largest economy fell 0.3 percent from the first quarter, when it rose 0.4 percent, according to the latest data from the French national statistics office Insee. That's the first drop since the fourth quarter of 2002.




The French economy contracted for the first time in more than five years in the second quarter as exports declined and companies cut spending. Adding to signs of slowdown, industrial production, which accounts for 15 percent of the French economy, fell for a second month in June. French business confidence declined to the lowest in more than three years in July and manufacturing shrank.





European companies are being hurt by the euro's 10 percent ascent against the dollar over the past year, which is making exports less competitive abroad. Over the same period, crude oil prices have increased 62 percent, sapping the spending power of both companies and consumers. Growth in the first quarter was revised down from a previously reported 0.5 percent.



Adding to signs of slowdown, industrial production, which accounts for 15 percent of the French economy, fell for a second month in June. French business confidence declined to the lowest in more than three years in July and manufacturing shrank.


Exports declined 2 percent from the previous three months, when they rose 2.4 percent, today's report showed. Consumer spending rose 0.1 percent in the three months through June after falling 0.1 percent in the first quarter. Corporate investments declined 1 percent in the second quarter after rising 1.2 percent in the January March period.

So this seems to be largely about reduced exports, increased imports and declining investment. External trade contributed a negative 0.5% to growth in the quarter.

Thursday, August 7, 2008

France Clocks Up Another Large Trade Deficit In June

France’s trade deficit widened sharply in June - reaching a record €5.64bn, exacerbated by the higher cost of oil and energy imports and weaker car exports. The trade gap - up from a revised €4.7bn in May - was significantly higher than many economists had forecast and will weigh heavily on an already sharply slowing French economy.

French exports increased 0.6 percent to 34.9 billion euros in June, with shipments to the U.S. and the Middle East declining. French business confidence fell to the lowest in more than three years last month as surging inflation and the stronger euro further dimmed the economic-growth outlook.

Growth in the second quarter is likely to be weak at best, with private sector analysts predicting expansion of between 0 and 0.2 per cent.

The trade deficit for the first half of 2008 widened to €24.4bn, up from €15.8bn in the same period last year. Anne-Marie Idrac, French trade minister, said that stripping out energy the trade deficit for the first half of 2008 had in fact narrowed by €3bn, helped by higher agricultural exports and a jump in Airbus sales.


For the last five years, the French economy has instead been dependent on domestic demand and construction. In this sense the French economy is the mirror image of the German economy, since in Germany the strong export performance until recently has driven GDP growth while domestic demand has remained weak. At the end of the day this self-dependence could turn out to be a boon. since the lesser dependence of the French economy on exports means it might be less affected by a global slowdown especially if oil prices and hence inflation ease back and the ECB starts to loosen monetary policy.

Tuesday, August 5, 2008

French Services PMI Shows Stronger Contraction In July

The euro zone's services sector slid further into contraction in July, hitting a five-year low, while inflationary price pressures remained near record levels. Final data in the monthly PMI survey of private sector companies showed that of the big four economies in the euro zone, only in Germany did services activity expand, and in this case slightly more quickly than in June. The RBS/Markit Eurozone Purchasing Managers Index for services companies, which range from banks to cafes, fell to 48.3 in July from 49.1, unrevised from the flash estimate and well below the 50.0 mark that separates growth from contraction.

The French services PMI plummeted to 47.5, its lowest since the survey began in 1998, while Italy slipped into further contraction to a survey low of 45.6.

Friday, August 1, 2008

French Manufacturing PMI Contracts In July

The seasonally adjusted RBS/Markit Eurozone Manufacturing PMI (Purchasing Managers' Index) registered 47.4 in July, down from 49.2 in June and slightly below the flash estimate for July of 47.5. The final reading signalled the second consecutive monthly deterioration in manufacturing sector business conditions and the steepest rate of decline since June 2003.

Output meanwhile fell at the fastest rate since December 2001 in France. The French manufacturing PMI slipped to 47.1 in July, down from the previous month's 49.2 reading.