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.

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.

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.

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.

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.