The eurozone economy is deteriorating with a raft of key indicators pointing to the recession continuing into the end of 2012. The disconcerting aspect of the recent round of data is that Germany, once one of the strongest countries in the eurozone, is now going backwards.
This has significant implications for the global economy. The eurozone, in aggregate, is the largest economic bloc in the global economy, accounting for 20 per cent of world GDP; it is 10 per cent bigger than the US economy and 15 per cent larger than China.
The eurozone composite purchasing manager index for the services and manufacturing sector fell to 47.7 points in October from 49.2 points in September to be at a level that is consistent with a 0.5 per cent fall in GDP in the December quarter. The PMI is back to level of June 2009, a time when the Europe was crawling out of a deep recession.
The poor PMI data were complemented by a sharp 3.3 per cent fall in German industrial orders in September. The market was forecasting a small rise. Economic weakness in German’s major export markets, especially countries within Europe but also in China, plus the high level of the euro, are seen to be weighing on the industrial sector.
The latest data add to concerns about the momentum in China’s economy given that the eurozone is the major export market for Chinese manufactured goods. Weakness in Europe will mean China will have to increasingly rely on other markets and domestic demand to sustain GDP growth at seven per cent.
The poor news from Europe fits with the recent slide in commodity prices which reflect a faltering of global demand. The Reuters-Jeffries CRB Index of commodity prices is 10 per cent lower than the recent peak in August; prices are down 20 per cent from the 2007 peak and for the moment remain weak.
Europe will increasingly be in the spotlight over the next few days.
Tomorrow the Greek parliament votes on the austerity measures needed for it to qualify for the next tranche of bailout funds. While the package is likely to pass parliament, rising social unrest and increased pressure on some parliamentarians to resist the proposed €13 billion of cuts will keep Greece in the headlines for the wrong reasons. Bond yields in Greece fell sharply in anticipation of the vote passing, with 10 year yields dropping to just above 17 per cent, to be down 70 basis points today and well below the 20 per cent yields of a few months ago.
Greece’s austerity package has come into increasing focus in recent weeks, particularly with the government revising its government debt level being revised to 189 per cent of GDP, more than 10 per cent of GDP greater than originally estimated. At the moment, the total revenue of the Greek government is not sufficient to cover the interest payments on the outstanding debt, highlighting the extent of the problem and the urgency for a solution.
If the package passes, the Greek austerity measures will cut around 2 percentage points off 2013 GDP, somewhat perversely deepening the recession. But without the measure, the hardship would arguably be greater, with full default eroding living standards for years to come.
If the package fails to pass, Greece would be on the cusp of default and clearly there would be huge risks for European and global markets.
Some wags are suggesting the Greek vote has the potential to be more important for global markets than the US presidential vote! Curiously, they may be right.
The European Commission will also publish its updated forecasts for individual member countries tomorrow and significant downgrades are expected. The EC update is likely to focus the markets minds on the rolling recession and will no doubt lead to more comparisons between Europe now and the problems of the Japanese economy from the early 1990s. Get set for more talk of a lost decade for the European economy.
All up, the eurozone still looks sick. The countries with huge sovereign debt problems have made little progress in repairing their balance sheets with debt levels still rising, albeit at a slower rate than before. The return to recession will hurt corporate earnings, stymie employment and entrench disinflation pressures.
It is to be hoped this dire picture for Europe doesn’t do too much additional damage to the global economy, but this looks to be wishful thinking.