This content is from: Portfolio

January’s Euro Zone Boost Was a Flash in the Pan

The euro zone’s apparent growth in January may have been illusory, according to recent data. And outside of Germany and France the numbers are even worse.

Hopes that the euro zone is pulling itself out of its slump suffered a cruel blow on Wednesday, after a closely watched survey suggested the currency bloc’s economy shrank in February.

The prestigious Purchasing Managers’ Index (PMI) published by Markit surprised analysts by showing a decline in output. The contraction — the fifth in six months — indicates that the increase in economic activity recorded in January may be a mere flash in the pan.

Chris Williamson, chief economist at Markit in London, said the report “highlights the ongoing risk that the region may be sliding back into recession.”

Responding to the disappointing numbers, Stella Wang, economist at Nomura in London, said, “The headwinds from fiscal tightening and the sovereign debt crisis will continue to weigh on the near-term outlook.”

The composite figure for all euro zone member states combined fell from 50.4 to 49.7 — signifying a switch from slight growth to slight decline, since 50 marks the dividing line between expansion and contraction. Employment fell for the second straight month, as companies trimmed headcounts in response to falling orders and shrinking backlogs of work. This drop suggests that many businesses foresee a long period of economic sluggishness, since firms customarily try to hold on to workers if they feel demand is set to pick up soon.

The disappointing data from the euro zone’s leading monthly economic survey throw doubt over European Central Bank president Mario Draghi’s recent assertion that surveys showed “tentative signs of stabilization of economic activity” — central-banker-speak for “things are not getting any worse.” The numbers are all the more worrying for investors because the survey looks entirely at the private sector. Euro zone politicians and central bankers have pinned their hopes on the ability of the private-sector economy to grow fast enough in the coming years to compensate for cuts in government spending compelled by the credit crunch and sovereign debt crisis.

The overall numbers masked wide disparities between different countries.

The survey indicates that output and employment continued to grow in Germany and France. Official figures for the end of last year revealed that Germany’s unemployment rate had already fallen to its lowest point since the country’s reunification in 1990.

But after stripping out these two comparatively buoyant economies, output across the rest of the euro zone fell “at a slightly steeper rate than in January,” according to Markit. The monthly Markit surveys suggest that if these two economies are excluded, the euro zone has not expanded for several months.

A year ago global investors would have been much more concerned about the report’s headline number and much less vexed at the country-by-country conditions that made up that number. The uneven picture of euro zone growth presented by Markit, however, is of much greater concern than in February 2011 because of the euro zone sovereign debt crisis — which creates the possibility that an economic crash in just one or two euro zone countries could derail growth across the world.

Wednesday’s market reaction to the Markit report confirmed investors’ continuing sensitivity to country-by-country conditions within the currency bloc, by showing a flight away from risky assets and into safe havens. The already extremely low yield on the benchmarket 10-year German bund fell a further 4 basis points (bp) to 1.93 percent. By contrast, rates for risky Portuguese 10-years rose 17bp to 12.61 percent, with Italian ten-years 5bp higher at 5.50 percent. The Eurofirst 300 index of euro zone equities dropped by 0.8 percent to 1,077.

Related Content