That Which The ECB Hath Separated, Let No Man Join Together Again!

In a recent post on the FT Money Supply Blog the ever perceptive Ralph Atkins made the following, very interesting, observation which, I think, goes a long way towards helping us all understand what exactly the thinking is which lies behind the ECB's current strategy for its handling of the Eurozone economy.

One of the subtleties of yesterday’s complex package from the European Central Bank was that it attempted to re-assert the principle of “separation”. When the financial storm broke in August 2007, the ECB insisted, doggedly, that emergency financial market liquidity injections were not related to its monetary policy. That remained firmly aimed at controlling inflation and still very much determined the level at which it set the main policy interest rate. Indeed, in July last year the ECB famously raised the interest rate to 4.25 per cent because inflation appeared to be getting out of control.

The separation that is being talked about here is not then a matrimonial one, nor is it a Montesquieu type notion of a necessary and sufficient separation of powers between Brussels and Frankfurt, rather what is involved is a separation, which is customarily made by the ECB, between monetary policy and liquidity provision. Now all of this may seem rather obscure, and it is, but it is also, I will argue here, rather central to understanding what the ECB is up to, or trying hard to be up to, at the present moment in time, and why what it seems to be giving with one hand it also seems to be taking away with the other.

For over a month now the ECB has been busily trying to lay down, before an ever observant corps of financial journalists, the main lines of its exit strategy from the emergency liquidity provisions introduced in the midst of the financial crisis. The first significant decision was the raising of the collateral standards for asset backed securities - from March 1 2010 the bank “will require at least two ratings from an accepted external credit assessment institution for all” asset- backed securities submitted as collateral, according to the press release of 20 November.

It is important to note that, at this point in time, the ruling only applies to asset backed securities, and the ECB has yet to formally confirm that the temporary relaxation of the collateral criteria as applied to government bonds for the duration of the financial crisis will be withdrawn as planned at the end of 2010. This, of course, has become far more than an academic question following this weeks decision by Fitch Ratings to cut the ranking of Greek sovereign debt to BBB+. What this means, effectively, is that should the two other major ratings follow suit (a not improbable scenario) then the ECB will no longer be able to accept Greek bonds as collateral, since while the ECB is currently accepting bonds with a minimum BBB- rating, this gesture is surely going to be phased out as the enhanced liquidity support is withdrawn . As things stand, as of 2011 at least one A- will be the minimum level required.

More significantly for many perhaps, this month’s ECB meeting also saw the ECB move to scale back its emergency lending to the banking sector in a way that clears the path for a move back to variable rate tenders later in the year and leaves policy makers free to raise rates as needed. The bank announced that this months 12-month tender would be the last and indicated that the 6-month tenders would also be axed after 31 March. The 12-month tender would also be offered at what amounts to a floating rate that would be indexed to future changes in the ECB’s main refinancing rate in a way which means it is impossible to discern in advance any particular intention about the level of the main refinancing rate. At the same time they indicated that the weekly, 1 month and 3 month financing tenders would remain in place on a fixed interest rate full allotment basis for as long as necessary, and at least until April 13, which means that while enhanced bank financing is being slowly phased out, it is still in place, and there is no definitive date yet for the complete termination of the programme.

Basically this all seems fairly logical, and yet, as Ralph Atkins asks, one obvious question remains, which is why the it should be the case that the ECB is so intent on implementing its “exit strategy” when, surely, given the seriousness of the problems which are still to be resolved in some key Eurozone economies, one might have thought they should continue to implement some sort of ultra-loose monetary policy just like their counterparts in the Bank of Japan, the US Federal Reserve, or the Bank of England?

Well, part of the key to unravelling the apparent dilemma the recent move presents is possibly to be found in a response ECB President Jean-Claude Trichet gave in answer to questions put to him by journalists after the last meeting. “We are not" he was at pains to say "signalling anything in terms of a hardening of our monetary policy - absolutely nothing,” So here we have it, as Frank Atkins suggests, the ECB is applying a straight principle of separation between monetary policy and liquidity provision (although I doubt that many financial journalists are quite as perceptive as Frank Atkins evidently is). Monetary policy remains as loose as it ever was, with the key refinancing rate staying firmly at the 1% level (hardly suprising in the context of the fragility of most Eurozone economies) while the enhanced liquidity provision is being systematically withdrawn. Now why should this be?

Greek Abuses


Well, one of the principal problems the ECB currently faces is the use which is being made of all that ever so generous enhanced liquidity ECB funding by Greek banks. According to analysts at Goldman Sachs Greek banks have been making very extensive use of the ECB liquidity provision. They estimate that at the end of the third quarter of this year, the four major Greek banks (Alpha, Eurobank, National Bank of Greece, and Piraeus) had availed themselves of some €28.3 billion in liquidity provision, down admittedly from the €42.3 billion they were soaking up at the end of the second quarter, but still way over the percentage of Greek participation in ECB capital. And even this reduction comes, it should be remembered, aftered the Central Bank of Greece directed local lenders to scale back their reliance on cheap funding from the European Central Bank.

Yet, as Goldman Sachs point out, such extensive use of the ECB exceptional liquidity provision might seem rather counterintuitive given that the loan to deposit ratio within the Greek banking system is pretty low (between 98% and 122% for the four major banks) and the liquidity position of the banks thus appears very sound. So why the hell do they need so much money you may ask?

Well, using ECB facilities made sense for Greek banks for a number of reasons. In the first place, ECB funding is relatively cheaper for Greek banks than for their European peers since the ECB makes no adjustment to the rates charged for the perceived higher risk of the Greek banks. As Goldman Sachs point out a Greek bank operating in Greece pays the same price as a French bank in France, even though the French bank operates in a lower risk environment and should, in theory, be able to finance at lower rates in the market. But this is what enhanced liquidity support is all about, if only those responsible for the financial and economic administration of Greece understood the situation.

Secondly, the current spreads on Greek government bonds (around 200 base points over German 10 year equivalents) offer Greek banks an exceptional arbitrage opportunity, since by taking advantage of the uniform ECB liquidity rate Greek banks can buy higher Greek government bonds with a much higher yield than the government bonds which their French or German counterparts buy. Regardless of the risk implied through by the Greek CDS spread, Greek government bonds carry a zero risk weighting when calculating riskweighted assets for capital purposes. So for Greek banks this arbitrage carries no capital impact whatsoever. That is to say the Greek banks have been doing very nicely indeed out of the Greek sovereign embarassment, than you very much. Hence it is not difficult to understand the ECB's growing sense of outrage with the situation.

On top of this we need to add the growing frustration of the ECB and EU Commission on finding that the Greek government not only had not taken advantage of these liquidity advantages to introduce effective policy action to stop the deterioration of Greek government finances, but in fact had gone in precisely the opposite direction, greatly exceeding in spending decisions all their earlier promises and guarantess. Finance Minister Papaconstantinou's final 2010 budget plan, as presented to parliament on November 20, made plain that the financial situation is much worse than anticpated, and that the government now aims to reduce the fiscal deficit from 12.7% of GDP this year to 9.1% of GDP next year. In the earlier draft, as made available to the EU Commission when it determined that Greece had taken insufficient action in 2009, the objective was 9.4% of GDP for this year. The Commission calculates that under unchanged policies, the Greek deficit would be 12.2% of GDP in 2010 with government debt at around 120.8% of GDP, up from 113.4% this year.

So to be absolutely clear, the Greek banks have been making money from arbitrage on ECB exceptional liquidity funding and in the proces financing the Greek government to carry out spending programmes while at the same time basically hoodwinking the European Commission about what it was they were actually up to. That is to say, the ECB has been effectively paying to lead the EU Commission straight down the garden path.

And In Spain Things Aren't Much Different

According to Bank of Spain data, Spanish banks were receiving approximately 82 billion euros in longer term financing from the ECB as of last September.



And, as in Greece, a large chunk of this money has been being immediately recycled to finance a ballooning government deficit, one which, as in Greece, is expected to hit 12% of GDP this year.



So the ECB has been providing, indirectly, funding to Spain's government in a bid to help Spain try to withstand the hefty economic crisis it is faced with, and this government spending (along with the significant drop in interest and loan payments produced by the 1% interest rate which impacts Spanish loans and mortgages) has given strong support to Spanish domestic demand. But after years of structural distortion, Spain's manufacturing sector is, let us remember, massively uncompetitive.



In fact, Spain's manufacturing sector was contracting in November at the fastest rate in any of the 26 countries included in the JP Morgan Global Manufacturing PMI survey.



And where, then,could we imagine that all this money which is being used to prop up demand has gone? Well, we could imagine couldn't we. On buying imports, that's where a big chunk of it has gone, even as Spain's unemployment queues grow longer and longer. After falling for several months, September's goods trade deficit was up again, and has in fact it has been rising since last August. So let's spell this out again - Spanish banks wer receiving a total of 82.5 billion euros in liquidity funding via your open market operations in September, up from 49.1 billion euros in September 2008, and this money, far from having a positive impact, has been going to sustain the unsustainable.



At the same time, Banco de España data show that over the same time period Spanish bank funding of government borrowing rose from around 300 billion euros to around 400 billion euros, while the monthly goods trade deficit increased from 2 billion euros to 5 billion euros between July and September 2009, and the September current account deficit bounced back to a rate of roughly 4.5% of GDP from the July low of around 2% (see chart below). So where, we might ask oursleves is the "correction" here? This kind of monetary and fiscal support on the part of the ECB is entirely justified and understandable, if it is really to give a cushion to countries like Spain and Greece to make a painful transition. But if the money is simply used to sustain the unsustainable, and even is used to make the situation worse, then what really is the ECB supposed to do?




It must be worrying ECB decision makers like hell that the enhanced liquidity provision which is being facilitated from the ECB is, in the context of the very low level of international competitiveness of a good part of Spanish industry and services following the distortions produced by the property bubble, having the rather perverse and completely unintended consequence of funding a rise in Spanish imports (thus putting ever more Spaniards in the domestic sector out of work) via the demand injection which is being administered by the Spanish government?


Monsieur Trichet Is Not Amused

Exactly these sort of concerns were put directly to Monsieur Trichet in his quarterly appearance before the Economic and Monetary Affairs Committe of the European Parliament last Monday by the Catalan MEP (and member of Convergencia Democràtica de Catalunya ) Ramon Tremosa. Here is is question:

Monsieur Trichet, there are countries in the Eurozone that are starting to recover and some others, like Spain, in which the absence of reforms will condemn them to remain in recession for the coming months.

In France, for instance, household lending and house purchases are now growing, while in Spain lending to households continues to decrease, and the housing market remains flat and lifeless. Therefore,

1.- Are you worried by such apparent diversity within the Eurozone?

2.- In your opinion, what practical implications such divergence will have for the conduct of monetary policy at the ECB?

Under a "European divergence" scenario, it could happen that the "Optimum Currency Area" assumptions wouldn´t be valid anymore, and that an "average" monetary policy would start being harmful instead.

For example, if some European countries (like Germany or France) start having positive inflation rates, while others (like Spain, Greece, Portugal or Ireland) continue in deflation, implementing an "average" monetary policy could be harmful: especially if the monetary policy, due to the high weight of the French and German economies, leads to the "average" monetary policy becoming slightly restrictive. This would lead to further rounds of deflation in the "deflationary" countries.

3.- Has the ECB a plan to cope specifically with this issue? Or will the ECB continue with the "average" monetary policy it has exercised until now?

Monsieur Trichet was not amused. In a strongly worded reply that was given extensive coverage in the Spanish press (but barely received a mention in the English language one), he told Ramon Tremosa in no uncertain terms that there would be no second chance for the banks, "There is not one Euro for Spain, and another for the other countries. There is only one Euro, one rate of interest, and one exchange rate".

So, the carving knives are now out. The ECB has been put in an impossible position, and intends to act as it sees fit. The lions share of the responsibility now rests on the shoulders of Europe's political leaders. Only this afternoon Angela Merkel came to the temporary rescue of an increasingly besieged Greece, by pointing out that healthier members of the euro zone aren't prepared to abandon Greece and other heavily indebted countries in the currency union. Worthy remarks, and absolutely to the point. But how far is it the responsibility of richer and economically healthy states to continually come to the rescue of those who insist on doing nothing to improve their own situation? On precisely the same day Spanish Prime Minister Jose Luis Rodriguez Zapatero came out fighting, and rejected all rejected negative economic forecasts that currently surround Spain, saying for the umpteenth time that Spain was about to emerge from recession. How much more in denial is it possible to be, and how much longer must the future of all Europeans continue to be put at risk by head in the sand statements like this?

It's All Greek To Me

In the long run we are all dead. But as someone else famously put it: we ain't dead yet, and in the space between these two undeniable truths move forex traders, financial markets and a host of other would be economic participants. The financial press is full right now of headline catching stories about how Greece is at imminent risk of sovereign default. The German newspaper Die Welt even had a lengthy piece this weekend with the catchy title After Dubai, Who Will Be Next (the answer is obvious isn't, otherwise what is the point of the question). One has the impression of a Europe filled to the brim with financial journalists busily rumaging the entrails, in search of the least glimmer of light which will confirm that something decisive and earthshattering might actually happen (soon), what with the German Der Spiegel announcing at the weekend that Greece's growing public deficit problem is to be an item on the agenda at the next Governing Council meeting of the European Central Bank on December 17 (surely the big news would be if it wasn't going to be there), and Bloomberg's Maria Petrakis telling us that Greek Prime Minister George Papandreou is toiling away in what many might consider was a vain attempt to "convince investors he can tackle the worst fiscal crisis in 15 years".

To add even more theatricality to the "drama" groups of protestors predictably battled it out with police on Athen's streets, in marches that were ostensibly to commenorate the death of a young teenager in last years riots. Even the normally staid and prudent Economist throws its weight in behind the charge with a piece whose title tells it all: "Default Lines" (perhaps the words "in the sand" could have been thrown in to add a bit more tension), which goes so far as to suggest that a partial Greek default might even be welcomed by some Eurozone member states, since it might take some of the heat off a hard pressed euro.

As if to add a little more spice to the story, Standard and Poor's decided to pick this Monday to announce it was putting Greece's A- long-term sovereign credit rating on Credit Watch with negative implications, with the unusual little "extra" that it gave the Greek government only 60 days, as opposed to the customary 90, to respond with adequate information to avoid the decision of downgrading to BBB+ (a level which if it was generalised across the rating agencies would imply that Greek Bonds would no longer be eligible as collateral at the ECB once the temporary relaxation of normal criteria which accompanies the extraordinary liqidity measures is withdrawn - although who really knows when this is likely to be). Naturally bondholders were not slow in reacting to the news and the spread on the 10-year Greek/German bond yield widened again, to 201 basis points from the 174 basis points level of late last Friday.

Actually, this is far from the first time that investors and journalists have been getting excited about the default risk on Greek public debt. In fact that very same Spiegel had an article headlined Greece Teeters on the Brink of Bankruptcy as far back as last April (that's a hell of a lot of "teetering" that has been going on), while the ever interesting Willem Buiter had a lengthy and influential blog post back in January on the worthy topic of whether or not it was structurally possible for a member state to default on its sovereign debt and remain in the eurozone (his conclusion was that it was, and in fact I don't disagree with him).

But gentlemen are we not getting rather ahead of ourselves. As I said at the start, in the long run Greek Sovereign debt may be dead than the deadest of ducks, but it ain't dead yet, nor is it likely to be in the most immediate future, there is far too much at stake for all of us for this to simply be allowed to happen, "sin mas". In fact it was the much more cautious Moody's who made the relevant points here in a press release issued last Wednesday where it argued forcefully that investors' fears that the Greek government may be exposed to a liquidity crisis in the short term are totally misplaced.

Now words here do matter, Moody's are completely right, the Greek government will not be exposed to a liquidity crisis in the short term (as opposed to a sabre rattling threat of one from the ECB among others), but this does not mean that they do not face a solvency issue in the longer term. That is, in the longer term I am absolutely sure that Greek public finances are deader than that proverbial dodo, the thing is, the long run simply hasn't arrived yet.

Let Moody's talk, since they do talk sense in this case:

"the risk that the Greek government cannot roll over its existing debt or finance its deficit over the next few years is not materially different from that faced by several other euro area member states".

So here's the first point, the Greek situation is a bad one, but it is not "materially different" from that of a number of other eurozone member states (I will return to this) even if the risk of its losing sovereign bond collateral eligibility is greater than that of any other member state, at this point. In the second place what Greece is inevitably facing is not a liquidity crisis (I'm sorry Maria, no financial crisis at this point), but a long term solvency one if it can't raise its trend growth rate in the context of the looming cost of maintaining an ever larger dependent population with a declining and ageing workforce. That is to say, the strategic problem for Greek public finance is not the quantity of debt accumulated to date, but rather the impending dead weight of future liabilities, and how these can be met. In this case, short term technical default to wipe the slate partially clean and start-up again would resolve nothing, since without a much higher underlying growth rate (without the aid of government deficit funding) the impending liabilites are not supportable, and decision takers at Ecofin and the ECB know this perfectly well, which is why they may well rattle the sabres, but in the short term at least we will see little in the way of exemplary action. For a sovereign default in Greece (a mature developed economy) would be a complete first, and would take us all into very new, and uncertain territory, since it could quite literally become a default from which there was no viable route for return.

So What Is The ECB Up To?

The FT's Frank Atkins has confessed to having been struck by the comments on Greece made by Jean-Claude Trichet, European Central Bank president, at the press conference which followed last weeks ECB rate setting meeting. I am sure he was not the only one who was listening, and given food for thought.

When asked about the country’s acute fiscal difficulties and the risk of a possible default, M Trichet simply stated he had every "confidence that the government of Greece will take the appropriate decisions”. This remark, as Frank Atkins says, was notable for its lack of forecfulness and could suggest he does not entirely rule out Greece facing sufficient problems servicing its debt that it might be forced into the hands of an external agency like the International Monetary Fund.

Indeed M Trichet's statement could be interpreted as meaning that an exasperated ECB would almost welcome such an eventuality, and might by withdrawing easy short term funding from Greek Banks even give things a hefty shove in the direction of just such an outcome. But an ECB which does not frown on the possibility of their most recalcitrant pupil being steered briskly towards the welcoming arms of the IMF is not the same thing as an ECB which envisaging, contemplating, or even in its wildest dreams vaguely imagining a Greek sovereign default. Any suchbdefault would surely follow, and not precede a (flawed and failed) IMF intervention, or would be the inevitable by prooduct of Greece being unceremoniously ejected from the Eurozone by sheer market forces, with the ECB relegated to meer spectator, unable despite its best efforts to contain the situation.

So my reading of the situation as it stands now, is that policymakers will do all that is in the power (which is a lot) to avoid the markets having so much say in the matter, but that what they do want to do is keep up the pressure on the new Socialist administration in Athens. Their aim is surely to try to turn back the “moral hazard” screw whereby European Union authorities, in giving the impression that they will always and ever ride to the rescue, no matter what the provocation (and Greek statistical authorities sure have been doing some provoking), simply encourage member state governments to continue to act recklessly. And this becomes all the more important given the fact, as I mentioned earlier, that Greece is only one among several problem pupils, and that more than the credibility of the Greek government (of which surely there is little left), what is being tested is the credibility of the European Union's institutional structure.

We might be forgiven for getting the impression that to date rather than acting as a stimulus to deep economic reform, Euro membership has rather acted to reward those countries who would get into more and more debt, with ever less sustainable economic models, by supplying them with funding at far cheaper rates of interest than the markets would otherwise make available. It is this particular clockhand that Europe's leaders would now dearly like to turn backwards, and this is why I have little doubt that it is in Greece that a stand will now be taken. If not, then that longest of long runs may arrive rather sooner than some of us, at least, are comfortable with.

Global Manufacturing Loses Momentum In November

Operating conditions in global manufacturing industry improved for the fifth successive month in November, although there was an evident slowdown in the overall rate of expansion, with differences between countries accentuating and not diminishing. The JPMorgan Global Manufacturing PMI aggregate reading came in at 53.6, down from October's 39-month high of 54.4, and signalling that the first wave of post crisis momentum may be losing force as governments slowly start to remove stimulus measures.

Also notable in this month's survey was the unevenness of the expansion which was registered, with some emerging economies - like China and Brazil - continuing to experience a solid expansion, others - like India, Turkey and Russia, showed some slowing in activity. South Africa returned to expansion for the first time in many moths. Among mature economies Japan showed a notable relaxation in the pace of expansion, with a significant drop in new export orders, and a fall in the backlog of work, while in Europe the "usual suspects" of uncompetitive contracting economies - Greece, Ireland, Spain and Hungary in particular - are still to really to show clear signs of recovery. Spain once more trailed the rest of the world, at least in terms of those countries included in the survey.

Commenting on the survey, David Hensley, Director of Global Economics Coordination at JPMorgan, said: "The headline PMI fell back slightly in November, but the global new orders and production indexes remained at very elevated levels. National PMIs point to broadly-based manufacturing growth. With final sales rising and inventories falling, the stage is set for continued, strong output growth. Encouragingly, the PMI indicates that the pace of job-shedding is easing although employment growth has yet to resume despite robust output gains."

Brazil And China Continue To Surge


The Brazil PMI rose to its highest level for two years driven by faster expansions in output, new order and employment The headline PMI at 55.5, from 53.7 in October, suggested a marked expansion in Brazil’s manufacturing economy. Furthermore, the latest reading was above the pre September 2008 series.

Underlying demand for Brazilian manufactures increased during November, as indicated by a sharp rise in total new business, with growth primarily coming from the domestic market, as new export orders were largely unchanged on the month. Companies generally linked improved domestic demand with better economic conditions inside Brazil itself, while survey respondents suggested that foreign demand weakened due to the strong real and difficult business conditions in key export markets.

China's November PMI pointed to another strong improvement in manufacturing operating conditions in the country. The headline HSBC China Manufacturing PMI rose to 55.7 in November, from 55.4 in October, pointing to a continuation in the most marked period of improvement in operating conditions since the start of data collection in April 2004, with Chinese manufacturers reporting that output growth was maintained for the eighth month running in November.

Data suggested that export sales rose again in November, increasing at the fastest rate since March 2005. Those firms that reported an increase in new export business widely attributed this to stronger external demand. November data signalled that staffing levels in the Chinese manufacturing sector increased at the second-fastest rate in the survey history, extending the current period of growth to six months.




Uneven Trend in Eastern Europe

Activity in Eastern Europe was very uneven, with Polish industry putting in its best performance in recent months, and Czech industry just sneaking over the dividing line between growth and contraction, while Russian industry continued to fall back for a second month, and Hungary remained well behind the rest of the group.

Survey data for the Polish manufacturing sector showed that business conditions generally improved in November, bringing to an end a downturn that had lasted a year-and-a-half. The headline HSBC Poland Manufacturing PMI posted a record month-on-month gain in November, rising from 48.8 to 52.4. This reading was the fourth consecutive monthly improvement and was the highest activity level since March 2008.

Survey responses suggested that the improvement was evenly distributed across both the domestic and export markets. Falling employment remained a drag on the overall recovery, although the rate of job loss slowed sharply during the month, to the weakest seen in the current nineteen-month sequence.

November saw the first overall improvement in operating conditions at Czech manufacturers since June 2008, with the headline HSBC Czech Republic Manufacturing PMI rising for the tenth consecutive month to hit 50.6 (from 49.8 in October), thus registering expanison for the first time in almost a year-and-a-half. Output and new order growth both gained traction, while employment fell at the slowest rate since September 2008. This was the fourth consecutive month in which manufacturing production rose and although it remained well below the long-run survey average, the rate of expansion marked an acceleration on October. Underpinning rising workloads was a fourth straight monthly increase in new orders. Incoming new business increased in both domestic and export markets, with demand slightly stronger in the former.




In Russia in contrast November saw an overall deterioration in business conditions for the second month running. Output rose only marginally, while incoming new orders fell for the first time since June. Growth of purchasing activity was maintained, but at a slow pace, while employment continued to fall. The headline seasonally adjusted Russian Manufacturing PMI remained below the no-change mark of 50.0, although the November figure of 49.1 indicated only a marginal rate of deterioration, even if it was a slightly worse one than the 49.6 posted in October. The fall in the PMI primarily reflected slower output growth and falling new orders.



Hungary remains the outlier among those East European countries who have PMI surveys, and the manufacturing PMI dropped 0.8 percentage points to hit 47.5 points in November, according to the Hungarian Association of Logistics, Purchasing and Inventory Management. It is now clear that the steady improvement that started in the spring has now ground to a complete halt, and even moved into reverse gear as conditions in the Hungarian economy continue to remain extremely poor. Before the present crisis the Hungarian index had been above the 50 level for more than three years until it slumped to 42.6 last October, going on to hit its all-time low of 38.5 in January. This is thus the longest stretch of contraction in activity since the survey was first launched, and there appears to be no immininent end to Hungary's industrial agony in sight at this point.





Eurozone Also Uneven

The final Markit Eurozone Manufacturing PMI rose to a 20-month high of 51.2 in November, up slightly from 50.7 in October and above the flash estimate of 51.0.



The headline PMI has now remained above the neutral 50.0 mark for two successive months. Growth of output and new work received was the fastest for 26 and 27 months respectively and, for both variables, stronger than earlier flash estimates. Manufacturing production increased for the fourth consecutive month in November, led by the strong performances of the intermediate and investment goods producing sectors. Higher output was also signalled among consumer goods producers, but the rate of expansion remained weak.

Disparities between the performances of the various member states continued in November, with growth in the headline index again being predominantly driven by Germany and France. The rate of expansion of output eased back slightly in France, but remained amongst the strongest gains seen since mid-2006, while in Germany growth hit a 26-month high. An increase in the output component was recorded for the Netherlands (25-month high), Italy (26-month peak), Austria and Ireland (the first production gain since February 2008). The contraction continued in both Spain and Greece, with rates of decline accelerating over those seen in October.

Germany

German manufacturers indicated robust rises in output and new orders in November, with rates of expansion in both cases accelerating to the fastest since the third quarter of 2007. Growth was supported by improved global economic conditions, which led to a resurgence of new export orders alongside higher spending among domestic clients. Meanwhile, with backlogs increasing for the second month running and the ratio of new orders to inventories at a comparatively high level, a number of forward-looking survey indicators now suggest that firms may well continue raising output from the depressed levels seen earlier in the year.

At 52.4 in November, up from 51.0 in October, the headline seasonally adjusted Markit/BME Purchasing Managers’ Index suggested there had been a solid improvement in business conditions over the month, although substantial job shedding persisted. Lower employment numbers have been recorded continuously since October 2008, with the latest fall linked to low levels of capacity utilisation following the slump in demand earlier in the year.

France

In France the manufacturing sector also registered another strong expansion in November, with both production and new orders continuing to rise strongly. On the other hand, there were signs of some underlying weakness since employment and output prices both fell further. The headline Purchasing Managers’ Index posted 54.4, down slightly from 55.6 in the previous month, but still the second-highest reading in the past three years.

French manufacturers continued to reduce their staffing levels during the survey period, with many firms citing restructuring plans, but the pace of job shedding remained weaker than the steep rates seen in the early part of 2009.

Italy

November saw the first overall improvement in operating conditions in Italian manufacturing industry since February 2008. Both output and new business rose at their fastest rates over two years, while new orders from abroad increased for the first time since January 2008. This being said, as Markit point out the data show only a fractional improvement and continued to highlight underlying weaknesses in the Italian economy in general. In particular workloads were too low to maintain current workforce numbers, and pricing power remained subdued.

The seasonally adjusted Markit/ADACI Purchasing Managers’ Index came in at 50.1, up from 49.2 in October, but only fractionally above the 50.0 no-change mark that separates improving from deteriorating conditions. Despite higher demand and production volumes, firms continued to cut staffing numbers, and manufacturers reported that lower workloads continued to reveal spare capacity at their plants. As a consequence staffing numbers were reduced for the twenty-second straight month, and at a marked pace.

Spain

Spanish manufacturing is evidently the worst of the bunch for yet another month, and November data pointed to a further deterioration in operating conditions across the manufacturing sector. Worse, the rates of decline of key variables such as output, new orders and employment all accelerated during the month.

In fact the seasonally adjusted Markit Purchasing Managers’ Index fell to 45.3 in November, from 46.3 in October. The PMI has now stood below the neutral 50.0 mark for two years, with the latest reading showing the strongest contraction since last June. Panellists indicated that lower demand, particularly from domestic sources, led to the latest drop in new business, which was the fastest since May. New export orders also contracted during the month.

With new orders continuing to decrease, Spanish manufacturers utilised spare capacity through the completion of backlogs of work. Excess capacity led firms to restructure their workforces accordingly, resulting in another sharp decline in employment. Moreover, the rate of job cuts was the fastest since June. And Spanish manufacturers continue to cut back on their holding of stocks, indeed the pace of reduction remained substantial despite easing from the month before. Stocks of finished goods also fell sharply in November, extending the current period of decline to thirteen months, as firms depleted stocks in line with lower new orders and production volumes.

Commenting on the Spanish survey data, Andrew Harker, economist at Markit, said:

“The Spanish manufacturing sector looks set to endure a bleak winter period, characterised by falling new business, job cuts and heavy price discounting. The glimpse of a possible recovery seen during the summer appears to have been only a temporary reprieve, with even the stabilisation of demand now seeming some way off again.”

Greece

Greece also retained its status as another of the Eurozone's weak spots, with business conditions continuing to be difficult for Greek manufacturers, while demand for their goods fell at an accelerated rate. The seasonally adjusted Markit Greece Manufacturing PMI slipped further, hitting a six month low of 47.3. If we exclude the brief respite registered in August, the headline index has now remained below the no-change threshold since October 2008.

Overall, new business fell at a strong pace, and dat showed that foreign demand was particularly weak, with incoming new work from abroad decreasing markedly since October. Backlogs were reduuced, and both unfinished work and employment continued to fall, the former at an accelerated pace. Respondents linked further workforce rationalisation to lower production requirements and cost pressures. Employment has now contracted during every month since May 2008.

Ireland

November data indicate the first joint increase in both production and new business registered by Irish manufacturing in twenty-one months. Employment continued to fall, but at the slowest rate for a year-and-a-half. As a result the seasonally adjusted NCB Purchasing Managers’ Index rose slightly to 48.8, from 48.0 in October. This result still means that overall operating conditions in the Irish manufacturing sector continued to deteriorate during the months, extending a run that has now lasted for two years.

Higher output during the month largely reflected new order growth, which in turn was attributed to strengthening demand. New export orders increased for the second time in three months, and at a faster pace than overall new business. Despite the expansion in new business, Irish manufacturers continued to reduce the backlog of outstanding work as the spare capacity resulting from the severe economic downturn remains only too evident.

Outside the Eurozone Sweden Slows Slightly Following A Strong Run

Sweden's seasonally adjusted purchasing managers' index dipped back to 56.0 in November from 56.7 p in October, according to data compilers Silf and Swedbank. However November was the sixth straight month that the index has been over 50 following the sustained rebound from a low of 32.7 hit in December last year. One of the problems in November was that the sub-index for order eased back to 57.9 from 60.8 in October, suggesting that while new orders continued to increase they did so at a slower rate. The sub-index for order backlogs also fell back, by an even greater amount, retreating to 53.6 points from 58.9 points, but it should be remembered that both the order bookings index and the backlog index had readings over 50 and thus showed continued growth. The employment sub-index, on the other hand rose, climbing 4.9 points to reach 48.7, suggesting that although companies continued to scale back on staff they did so at a slower rate. This easing in the Swedish PMI expansion rate is hard to interpret at this point, although it could be connected with the recent rise in the krona (since September). It could also be a result of the earlier strong bounceback from very low levels losing some of its force.

While Turkey's Expansion Continues To Lose Momentum

The Turkish headline PMI posted 51.8 in November, indicating that business conditions in the Turkish manufacturing sector improved for the seventh consecutive month. They did so however at a rate which eased again since October and indeed one which hit a six-month low.

New order growth although still solid, slowed from October, with the rate of increase being the lowest registered during the current seven-month expansion. The rate of growth of new export orders also eased during November, although it was higher than the average recorded for the earlier seven-month period of increasing export business. The overall rise in new orders led to a further rise in output during November, although the rate of increase fell for the fifth successive month from the series high posted in June 2009. Backlogs of work fell markedly in November, indicating that capacity constraints remained largely non-existent. In addition, anecdotal evidence suggested that companies were utilising stocks of finished goods to partially fulfil order obligations, and stocks of finished goods fell for a fourteenth successive month.

South Africa Returns To Growth

The Kagiso South Africa Purchasing Managers Index rose back above the neutral 50-index point level in November, even if the rebound in South Africa’s manufacturing sector is expected to be muted compared with historical experience, especially given the strength of the rand. The November PMI poked its nose over the 50 neutral mark and hit to 50,3 points, the first time this has happened since May 2008. This was the fourth consecutive gain for the PMI and bringing to a close the run of 18 months of below 50-index point readings, by far been the longest (and most severe) decline in the South African factory sector since the survey started in 1999. The previous record contraction had been the six months between May 2003 and October 2003. Nevertheless, PMI readings from the first two months of the fourth quarter suggest that the third-quarter manufacturing sector rebound has most probably been sustained during the fourth quarter. The average PMI for October and November stood at 49 points, compared with the average 41 points recorded for the third quarter.


The annual decline in South Africa’s manufacturing output has slowed, contracting by 11,4% year-on-year in September, compared with 15,2% in August. This was an improvement on the 17,1% year-on-year contraction in output recorded in June, the 17,2% year-on-year decline recorded in May and the record 21,6% slump in manufacturing output in April.

At the same time it should be noted that the expected business conditions subindex fell for a second consecutive month to 65, down 5.3 index points since the start of October. Kagiso and the Bureau of Economic Research (BER), which conducted the PMI survey, suggest that this could indicate that purchasing managers were becoming less optimistic about future prospects.

On the other hand the new sales orders index recorded a 5.5 point increase to 54.4 in November, the highest level since April 2008, suggesting that demand for manufactured goods has returned in South Africa, at least for the time being. Job shedding continued, albeit at a slower pace, with the employment index improving to 46.6, compared with 45 in October.

“Although the level of the index suggests continued factory job cuts, it does indicate that the rate of retrenchment is moderating. This is welcome news from an economywide employment perspective as official statistics showed that the manufacturing sector was the hardest hit by job losses during the third quarter of the year,” According to the comment from André Coetzee for the survey organisers.


Japan's Production Surge Fades

Despite remaining above the neutral level of 50.0 for yet another month , the seasonally adjusted headline Nomura/JMMA Purchasing Managers’ Index fell in November to a four-month low of 52.3, signalling that growth in the Japanese manufacturing sector continues to lose momentum. In particular the survey organisers noted slower growth of output and new business, even if job shedding eased to its weakest rate for fifteen months, even as output price deflation the hit the fastest rate since December 2001.

November’s survey pointed to weaker rises in output and incoming new business, while pre-production inventories were reduced for the ninth month running. Suppliers’ delivery times lengthened at an accelerated rate, while the pace at which job cuts were implemented continued to ease.

Those survey participants that reported greater inflows of new work generally attributed this to firmer demand, with China mentioned in particular. However, growth was partly offset by subdued market conditions as customers remained wary about the immediate outlook for economic activity.




Commenting on the Nomura/JMMA Japan Manufacturing PMI data, Minoru Nogimori, Economist of Financial & Economic Research Centre at Nomura, said:

“The Japan Manufacturing PMI fell 2.0 points to 52.3 in November. Although it remains above the key dividing line of 50.0, it fell for the second consecutive month, suggesting that the pace of improvement in operation conditions is slowing. The New Export Orders Index also fell by 1.1 points to 50.5, signalling that the rate of expansion in export orders has obviously slowed. We see growth of Japanese production activity decelerating, owing to the fading impact of economic rebounds overseas, yen appreciation and as government stimulus measures start to wane.”

And The US Expansion Also Eases

The US manufacturing sector expanded for a fourth month running in November but at a slower pace than expected. The Institute for Supply Management said its manufacturing index fell to 53.6 percent from 55.7 percent in October. The slowdown was sharper than the average analyst forecast of a 55.0 percent reading. Regarding the sub-indexes, the ISM said its index of new orders was 60.3 percent, 1.8 percentage points above October's level, suggesting accelerating growth. The production index however fell 2.3 points to 50.8 percent, indicating output expanded more slowly. Employment also grew more slowly, with the index at 50.8 percent from 53.1 percent a month earlier.