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Friday, October 24, 2008

Eurozone October PMI's Indicate Sharp Recession In The Works

by Edward Hugh: Barcelona

“The latest flash PMI indicates the alarming extent to which the financial crisis has developed rapidly into an economic crisis, with the Eurozone economy contracting at the fastest rate for over ten years in October. Manufacturers are the hardest hit, with the sector contracting at a pace exceeding even the most pessimistic of forecasts polled by Reuters.
Chris Williamson, chief economist at Markit.

The eurozone economy continued the contractaction registered in the third quarter in October at a speed not seen since the start of the euro in 1999, with the kock-on effects of the global bank crisis hitting manufacturing industry especially hard, and making a huge dent in industry’s order books.These are the grim conclusions which can be drawn from the latest - Flash - Purchasing Manager Index (PMI) readings for the economies of 15-country currency zone. The low readings registered are provisional, but experience shows that they are unlikely to be that far off the mark, and they obviously make even more likely substantial cuts in European Central Bank interest rates over the coming months, especially since price pressures also cooling rapidly as overcapacity issues yawn before us. The results only serve to add to concern that the recession which the eurozone in all likelihood entered on April 1 2008 that will prove to be a long drawn out and protracted affair.

Eurozone Composite Reading Falls Sharply

- Flash Eurozone Services Business Activity Index at 46.9 (48.4 in Sep.); lowest since Oct. 2001

- Flash Eurozone Manufacturing PMI(3) at 41.3 (44.5 in Sep.); new record low

- Flash Eurozone Manufacturing Output Index(4) at 40.5 (44.1 in Sep.); new record low

The Markit Flash Eurozone Composite Output Index sank to a new record low in October, signalling the steepest monthly reduction in private sector output since the survey data were first compiled in July 1998 and the fifth successive monthly contraction.

Output fell at a new record pace in manufacturing, while services activity showed the second-sharpest deterioration ever recorded, with the decline exceeded only by that seen in October 2001. Expectations of business activity in 12 months' time in the service sector plummeted and hit a new record low - and by a wide margin. Falling output and business confidence were linked to a record monthly drop in demand for goods and services, as measured by the composite new orders index. Overall, new orders have now fallen for six consecutive months.

The “composite” purchasing managers’ index, covering manufacturing and services, slumped from 46.9 in September to 44.6 in October, the lowest since the survey began in July 1998. A figure below 50 is taken to indicate a contraction in activity. Eurozone manufacturers’ new orders fell at the sharpest rate recorded, led by a slump in export orders. Service sector new business did not contract as fast but still saw the second steepest fall on record.

We only have a breakdown of country secific indices for France and Germany, and French manufacturing is evidently performing a lot worse than its German equivalent, although the contraction in German industry is getting sharper by the month, and anecdotal evidence does suggest that there may be much worse to come as demand from the very important customer base in Eastern Europe comes virtually to a dead stop in the wake of the credit crunch. So even Germany saw private-sector output contracting for a second consecutive month, and business sentiment for the next 12 months sank to the lowest level registered there since records began in June 1997.

The composite reading for manufacturers' new orders fell at the steepest rate yet registered by the survey, led down by a record fall in new export orders. In comparison, new business in the service sector showed a more modest rate of decline, though still posted the second largest contraction yet seen by the survey.

Input price inflation, on the other hand, having hit a near-eight-year high back in July, eased back again for the third successive month in October, dropping to the weakest pace since July 2005. The monthly fall in the rate of price increases was the sharpest ever recorded by the survey, led by a steep easing in manufacturers' input price inflation, which in turn reflected lower commodity prices and an increased willingness among suppliers to cut prices to sell stock. Input cost inflation also moderated in the service sector.

Output prices rose only slightly during the month, the rate of increase having slowed for the third successive month from July's record high to reach the weakest since December 2005. Upwards pressure on charges was alleviated by weaker growth of input costs, but also reflected discounting in the face of falling demand.

“Price pressures are collapsing alongside falling demand, which will hit profits further but will help pave the way for lower interest rates.” Chris Williamson, chief economist at Markit

Deceleration in Germany's Manufacturing Sector Accelerates

"October's PMI indicated the sharpest decline in German private sector activity
since mid-2003," Tim Moore, an economist at Markit Economics, said in a
statement. "Market demand was shaken by the latest global financial turmoil, as
firms became increasingly concerned about the economic outlook and access to

The rate of expansion in the German economy dropped back to its lowest level in more than five years in October. The preliminary flash estimate of the composite purchasing managers' index for what is the euro zone's biggest economy fell to a 64-month low of 46.7 in October from 48.5 in September. Manufacturing activity in contracted for the third straight month with the reading plunging to 43.3 from a final reading of 47.4 in September.

In addition, economic activity in the service sector stalled for the first time since January as the flash reading slipped to 49.7 from 50.2.

However, the data showed input price inflation eased to its slowest for more than three years in October, with the month-on-month fall in the index was the largest since the series began in January 1998. This reinforces data out this morning (Friday) from the German Federal Statistics Office which showed that German import prices fell 1.0% month-on-month in September after declining 0.8% in the August, as crude oil prices continued to pull back from their record high in July. On an annual basis, the rate of import price increase slipped back to 7.6% from 9.3% in August.

The data suggests that the German economy may well continue to be in recession in the fourth quarter (assuming that the forthcoming 3rd quarter data do show a contraction) as demand across the global economy continues to falter, a process which will hit an export dependent economy like the German one especially hard.

French Manufacturing Now In Sharp Retreat

French manufacturing activity contracted at its fastest pace in a decade in October, while new orders in both manufacturing and services fell at their sharpest pace in 10 years. The flash estimates of the Markit/CDAF PMI showed the headline figure for manufacturing fell to 40.8 in October, its lowest since data was first collected in April 1998, from 43.0 in September.

The services sector, which accounts for around two-thirds of the euro zone's second largest economy, saw its index slip to 48.8 from 50.1 in September, while the new orders sub component fell to 45.3 - its lowest since the survey began in May 1998.

With the new order index for manufacturing also hitting a series low - it fell to 34.7 in October from 37.5 in September, all the indications are that tough times lie ahead given the extent of the worldwide economic slowdown.

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.

"Unfortunately nothing here indicates that we've hit bottom," said Chris Williamson, chief economist at Markit. "The availability of credit is definitely becoming a problem and if that doesn't turn around quickly then output numbers will probably follow those order book numbers down."

Italian Business Confidence in Free Fall

Both Italian Business and Consumer Confidence fell back in October. Between the battering the Italian banking sector is taking on the one hand, and the ongoing contraction in the real economy on the other, Italy isn't exactly in the best of shape right now. Unfortuantely, despite years of warnings little was done, and now all the chickes come home to roost, and, as if in an illustration of what the expression "worst possible case scenario" means, they all come home to roost at once.

Italian business confidence sliiped to its lowest level in 15 years in October while consumer optimism eased back as the global financial crisis darkened the economic outlook and offset the positive effects of cheaper oil prices. The Isae Institute's business confidence index fell sharply to 77.7 from a revised 81.8 in September, according to the news release from the Rome-based research center earlier this morning (Friday).

Consumer confidence also slipped nack, falling to 102.2 from 102.8. Interestingly the drop in consumer confidence is not as sharp as that in business confidence, and we are still above the July low point (when oil prices hit a maximum), but the outlook for Italian households can scarcely be better than that for Italian corporates at this point. Perhaps the financial news just takes longer to sink in, while the impact of falling oil prices is pretty immediate, at least on the consumer outlook.

Even before the outbreak of the latest round of financial turmoil Italy's economy was in all probability in recession after contracting 0.3 percent in the second quarter. Confindustria expect the Italian economy to actually contract in whole year2008, while the Isae Institute recently cut their own forecast for Italian growth, saying the economy would stagnate this year (ie neither expand nor contract), putting in the worst performance since 2003. In the short term things can only deteriorate from this position as the growing shock from the financial sector continues to pound the Italian real economy.

Spain's Unemployment On The Rise

Spanish unemployment hit a four-year high in the third quarter of this year as tens of thousands of jobs are lost every month as the decade-long housing boom comes to an end.

According to data published today (Friday) by Spain's National Statistics Institute, the jobless rate rose to 11.33% in the third quarter from 10.44% in the second quarter. Lest we get confused here, there are two different systems for collecting data, one a monthly labour survey (based on interviews) on the basis of which the quarterly reports are prepared, and which go into the National Accounts (for GDP measurement purposes) and the monthly report from the Labour Office (or INEM). In some ways the latter give a better day to day comparison of the evolution of jobless trends, and the next one of those will be out at the start of November.

According to the September INEM report the number of people out of work in Spain rose to an 11-year high in September, and this was the sixth consecutive month which has seen an increase. The number of job benefit claimants rose by 95,367 in September, up 3.7 percent from August, to 2.6 million, the highest since May 1997. This was considerably above what many analysts had been expectating and the trend is likely to continue. Personally I don't think there can now be any doubt about it, what is likely to become the longest running recession in Spanish history started on 1 July 2008. That's a historic date now. Make a note of it somewhere. For your grandchildren, perhaps.

In their accompanying statement, INE said that 78,800 jobs were lost in Spain during the three months to Sept. 30. The INE also said 164,300 jobs had been lost since September of last year, and this was the first time the total number of jobs had declined on an annual basis since 1994.

Until the financial crisis began in August of last year, Spain had been one of Europe's engines of economic growth and job creation. Largely thanks to a massive home-building boom, the eurozone's fourth largest economy created over a third of all new jobs (and consumed more cement than any other single member country) in the single-currency area over the last decade.

This boom allowed Spain's historically high unemployment rate to fall to just under 7.95% in the second quarter of 2007. But as the housing boom has slowed (from January 2007) and then collapsed following the onset of the global financial crisis all this has changed. With home sales and new home starts now in free fall, the INE said 354,000 construction sector jobs were lost in the third quarter from the same period a year earlier.

According to internationally comparable monthly data released on Oct. 1 by Eurostat - the European Union's statistics coordinator - Spain had an 11.3% unemployment rate in August, the highest among the European Union's 27 member countries.