Friday, March 27, 2009

The Euro-Zone March PMI Holds Near February's Record-Low

The Euro-Zone composite Purchasing Managers Index (PMI) rose slightly in March (to 37.6) from the record low of 36.2 registered in February. The PMI reading for manufacturing rose to 34.0 (from 33.6) while the services component was up to 40.1 (from 38.9). (You need to bear in mind that 50 is the neutral point (marking the boundary between expansion and contraction) on these indexes, and any reading below 40 means a very significant rate of contraction).

Bottom, I See No Bottom, Only A Mirky Deep Below

So it now seems virtually certain that the Q1 Eurozone GDP contraction will be far worse than the Q4 2008 one. Taking into account that the eurozone contracted by 0.2% in Q3 2008, and by 1.5% in Q4, then, in my humble opinion, the data we are seeing for this quarter are entirely consistent with a 2% quarterly contraction (or an annualised 8% rate of contraction) or more. As I said last month, not quite Japan territory yet, but certainly not far behind. And for those who simply don't believe the PMIs can tell you so much, here is Markit's own chart, showing the strong underlying relationship between movements in GDP and the *flash* composite PMI. Pretty impressive I would say.

Economic activity in Germany seems to have continued to contract at virtually the same rate in March as in February, as the services PMI was 41.7 (up from 41.3, the sixth straight month of contraction) while manufacturing PMI increased to 32.4 from 32.1. And we are at the height of the stimulus package here. Downside risk for the German economy for the second half of this year now looks very strong indeed. That Commerzbank 7% annual contraction forecast is looking more and more credible.

The German economy's heavy dependence on exports means it has suffered very badly as the global financial crisis has reduced demand for its industrial goods, and March's manufacturing reading came in well below that of France, which was 36.3 (up from 34.8 in February) . The East European connection means it is doubtful that we will see any sort of recovery in German manufacturing industry in 2009, since the economies in the East are now contracting at almost lightening speed.

French private sector activity declined at a generally slower pace in March than in the previous month, but firms reported they were cutting jobs at a record rate, casting doubt over the outlook for the coming months. The Markit/CDAF composite PMI - which combines data from services and manufacturing firms - rose to 39.6 in March, from the record low of 36.7 registered in February. The headline service sector measure was at 42.9 compared with February's 40.2 reading.

Markit's chief economist Chris Williamson, commenting on the results, remained cautious about reading too much into the modest rise. "It throws up little in the way of an improvement in terms of concrete measurements... We could still go anywhere from here," he said, adding that hopes of a rebound in the second quarter would depend on consumer spending.

German consumer confidence declined for the first time in seven months going into April, as workers worried about keeping their jobs in the face of the worst recession since World War II. GfK AG’s forward looking confidence index for April, based on a survey of about 2,000 people, declined to 2.4, the Nuremberg-based market- research company said in a statement yesterday.

As Chris Williamson emphasised "There could be some easing of the pace of decline in the second quarter, that's the general expectation.............But there's still scope for things to go wrong if consumer spending plummets and if exports are hit harder by the euro's strength."

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