Monday, June 29, 2009

Europe's Retail PMI

Euro area retail business conditions continued to deteriorate in June, with sales, employment, purchasing of stock and margins all falling when compared with May. The Bloomberg Euro-Zone Retail Purchasing Managers' Index did however rise from 47.1 to 47.5 in June. On the other hand, the reading remained below 50.0, meaning that activity was still lower in June than in May.

So, despite reasonable consumer confidence readings, consumption in Europe remains weak. German retail sales fell for a 13th month in June as households continued to curb spending, according to the latest Bloomberg/Markit purchasing managers’ index survey. The PMI was down to 46 from 46.3 in May. Any reading below 50 signals contraction.

German retail sales have now been falling since 2006, according to data from the Federal Statistics Office.

But if you thought the German retail sales performance lacklustre, you should try using the Italian one as a benchmark. Italy saw sales drop for the twenty-eighth consecutive month in May. The retail PMI rose from 46.5 to 47.0. Well, let's be positive, this was the smallest monthly decline since October 2007. The rate of contraction has now moderated constantly since last November's record drop.

Which brings me to one of the themes I will be looking at in more depth over time: France. In my opinion it is the French economy, and not the UK one, which is currently the most robust in Europe, and the big question will be, why is this? Meantime, retail sales fell in France for the fifth successive month, but the rate of decline was only 49.4, just below the expansion mark. And the best performance this month.

Tuesday, June 23, 2009

Europe's Economies Move Sideways In June

The eurozone economies moved sideways in June, with the flash reading on the composite purchasing managers index (which covers both industry and services) for the 16 nation euro area rising to 44.4, fractionally above the 44 registered in May. So we are just where we were before, contracting more slowly than in Q1, but still contracting, and the fiscal bullet is now almost spent.

Not without importance was that the reading came in significantly weaker than the consensus expectation for a sharp increase to 45.3. So the market *has* been getting ahead of itself.

On the face of it, the index is now consistent with a quarterly drop in GDP of around 0.5 percent, well below the 2.5 percent fall registered in the first quarter. However - as Capital Economic's Ben May notes - "the index has recently been a poor predictor of growth and the hard data have painted a less upbeat picture."

The situation was broadly as expected on the manufacturing front - with a rise to 42.4 from 40.7, but this is still quite a strong contraction. On the one hand the improvement in the factory index is pretty generalized and so, with the new orders-stock ratio rising further, there should be further improvement in the coming months. On the other, given that this upward trend in the factory index is mostly inventory-driven, caution needs to be exercised in extrapolating the tendency to the whole economy.

Ben May also points out that the drop in the services PMI from 44.8 to 44.5 suggests that fiscal and monetary stimulus measures "are yet to have a significant impact on domestic demand." Maybe we could rephrase that slightly, their bolt seems to have been shot without result, and the fiscal element, at least in Germany, Spain and Italy will now increasingly have a constraining impact.

German Contraction Worsens

More worryingly, the rate of contraction in Germany's private sector accelerated slightly this month, with flash estimate of the Markit composite PMI falling to 43.4 from the seven-month high of 44.0 in May.The flash estimate for the manufacturing PMI index rose to 40.5 from 39.6 in May, but the flash services PMI reading fell to 44.3 from 45.2 last month. And in the manufacturing sector the ratio of new orders to stocks of finished goods fell back to 1.12 after rising to 1.18 in May. Which effectively means inventories started to rise again.

French Economy On The Mend

On the other hand, conditions in the French improved for the fourth straight month in June, helped by much slower falls in the level of new orders. The flash estimate for the Markit/CDAF PMI rose to 47.7 in June compared with 46.6 in May.

The key to the improvement - according to Markit - was a sharp jump in the composite new orders index, which hit 48.3 compared to May's reading of 45.3, suggesting that demand in the euro zone's second largest economy is steadily on the mend. "The composite new orders index is getting close to stabilisation. We're still very much on course for a strong easing and it does suggest that by the end of the year we could be seeing growth again in France," according to Chris Williamson, chief economist at Markit.

The June manufacturing PMI rose to 45.5 from 43.3, the slowest pace of contraction in activity since August last year. However, Markit cautioned against taking an overly optimistic view of the data, stressing that conditions in the French economy remain fragile, and recovery is likely to be unstable.

Just how fragile was emphasised by the fact that the services sector PMI slipped back to 47.5 from 48.3 in May, following three consecutive monthly increases.

And just to underline the fragility part, we learnt today that spending by French consumers on manufactured goods fell in May, led by a sharp drop in purchases of clothing and household goods, according to the statistics office INSEE today (Tuesday). Consumer spending fell 0.2 percent month-on-month in May, well below a consensus forecast for a rise of 0.2 percent. Total consumption in May was down 1.6 percent compared to May 2008.

That having been said, I have no doubt, and unequivocally, to say that as far as I am concerned France is the strongest (or least weak) economy among the EU big five (France, Germany, the UK, Italy and Spain) at the moment.

Saturday, June 20, 2009

Face Book Links

Quietly clicking my way through Bloomberg last Sunday afternoon, I came across this:

Facebook Members Register Names at 550 a Second

Facebook Inc., the world’s largest social-networking site, said members registered new user names at a rate of more than 550 a second after the company offered people the chance to claim a personalized Web address.

Facebook started accepted registrations at midnight New York time on a first-come, first-served basis. Within the first seven minutes, 345,000 people had claimed user names, said Larry Yu, a spokesman for Palo Alto, California-based Facebook. Within 15 minutes, 500,000 users had grabbed a name.

Mein Gott, I thought to myself, if 550 people a second are doing something, they can't all be wrong. So I immediately signed up. Actually, this isn't my first experience with social networking since I did try Orkut out some years back, but somehow I didn't quite get the point. Either I was missing something, or Orkut was. Now I think I've finally got it. Perhaps the technology has improved, or perhaps I have. As I said in one of my first postings:

Ok. This is just what I've always wanted really. A quick'n dirty personal blog. Here we go. Boy am I going to enjoy this.
Daniel Dresner once broke bloggers down into two groups, the "thinkers" and the "linkers". I probably would be immodest enough to suggest that most of my material falls into the first category (my postings are lo-o-o-ng, horribly long), but since I don't fit any mould, and Iam hard to typecast, I also have that hidden "linker" part, struggling within and desperate to come out. Which is why Facebook is just great.

So, if you want some of that up to the minute "breaking" stuff, and are willing to submit yourself to a good dose of link spam, why not come on in and subscribe to my new state-of-the-art blog? You can either send me a friend request via FB, or mail me direct (you can find the mail on my Roubini Global page). Let's all go and take a long hard look at the future, you never know, it might just work.

Tuesday, June 16, 2009

Everything In Germany Is Going Up....

Everything in Germany is going up, except it seems the real economy - and except of course prices, which were stationary in May (that is a change of 0% year on year - the lowest inflation rate for over 20 years). Anyway, today it was the turn of investor confidence to put in another good reading. In fact German investor confidence rose to what is effectively a three-year high in June. Aparently investors feel the recession in Europe’s largest economy is bottoming out.

The ZEW Center for European Economic Research said its index of investor and analyst expectations increased to 44.8 from 31.1 in May - the highest reading since May 2006.

Unfortunately, there is little real evidence to support this highly optimistic view of the future.

True German retail sales were also up in April - for the first time in four months - as warmer weather, falling prices and the late Easter holiday seem to have encouraged consumers to spend more. Seasonally adjusted rose 0.5 percent from March, according to the Federal Statistics Office. Nonetheless, year on year sales were still down 0.8 percent.

And in the longer run German retail sales are declining steadily.

Indeed according to the May retail sales PMI Germany posted the steepest fall in monthly sales among the "big three", replacing Italy poll position. The German PMI fell to 46.3, the twelfth successive month the measure has shown a negative reading. Interestingly, the PMI more or less accurately picked up the improved position in April.

Exports Still Stuck At A Very Low Level - And Falling

Both exports and investment spending plunged in Germany during the first quarter, dragging the economy down into its deepest economic slump on record.

Exports were down 9.7 percent from the fourth quarter of last year and company investment declined 7.9 percent, according to the detailed report from the Federal Statistics Office. The Office reported that GDP fell a seasonally adjusted 3.8 percent from the previous three months, confirming the initial estimate from May 15. That’s the largest drop since quarterly data were first compiled in 1970.

German exports have not touched bottom yet, and they are still falling, with seasonally and working day adjusted exports dropping 4.8 percent in April from March, when they rose a revised 0.3 percent. Since the German economy is completely export dependent, this implies the obvious, that the German economy is still contracting. I don't think anyone ever doubted this, but looking at the way the investor confidence reading is being presented today, you could be forgiven if you had gained the opposite impression.

Indeed on a year on year basis, exports were down by 22.9%, the fastest rate of decline registered so far, although since such annual stats are not working day corrected I wouldn't read too much into that just yet, since you really do need to average across March and April due to the Easter impact.

Both Trade And Investment Drive The Economy Downwards

Looked at between quarters the German economy contracted by 2.2% (or at an 8.8% annualised rate) over the last three months of 2008, following a 0.5% drop in both the second and third quarters of last year.

According to the statistics office, the decline was mainly due to movements in the balance between exports and imports (goods and services combined). As in the fourth quarter of 2008, German exports fell much more than imports. The negative first quarter performance was also associated with a notable decline in investments (down 7.9%, quarter on quarter). Capital formation in machinery and equipment, in particular, was much lower. Companies invested 16.2% less in machinery, equipment and vehicles than in the last quarter of 2008.

Inventories were allowed to deplete during the quarter, which reduced growth by 0.5 percentage points. The only really positive elements were household and government consumption, which were up by 0.5% and 0.3% respectively.

In contrast to the bleak picture for investment, fixed capital formation and German exports, final consumption expenditure was ever so slightly up quarter on quarter - by 0.1% - and even did slightly better than in the last quarter of 2008 (– 0.0%).

On a year on year basis, household consumption was marginally down though - by 0.1% (following a 0.5% drop in the fourth quarter of 2008), general government consumption expenditure, however, was up by 0.8%.

The Long Term Outlook

The first-quarter GDP performance has thus completed an unprecedented four quarters of continuous contraction for the Germany economy. The German government has said it now expects the economy to contract by 6 percent over the year as a whole, and even optimist ECB council member Axel Weber has admitted that while he can see some positive “rays of light”, there’s still “no reliable indication that the global economy is past the worst.” The euro-region economy may only “gradually stabilize during the latter part of 2009.”

The longer term decline in German GDP performance is now pretty clear (see chart below).

According to the Federal Statistics Office:

Measured in terms of gross domestic product changes at 1995 prices, the rates of economic growth in the former territory of the Federal Republic of Germany and - since 1991 - in Germany have continuously declined since 1970. While the average annual change was 2.8% between 1970 and 1980, it amounted to 2.6% between 1980 and 1991 and to 1.5% between 1991 and 2001.

Since 2001 the performance of the German economy has in fact been worse rather than better, much to the consternation of those who hoped that many years of sacrifice in the form of wage deflation and structural reform would lead to a rebirth of the country's former economic prowess. In reality the German economy shrank (0.2%) in 2003, and grew by only around 1% in both 2004 and 2005. And while the German economy picked up notably in 2006 and 2007 (with growth rates of 3.2% and 2.6% respectively) and many talking in terms of such grandiose notions as global uncoupling and "Goldilocks" type sustainable recoveries, the most striking feature of the recent German dynamic has been the way that internal demand failed to respond to the externally driven export stimulus. Of course, all the speculation came to an abrupt end in 2008 when the German economy once more entered recession as world trade expansion slowed and exports collapsed (with GDP only growing by 1% over the year), while 2009 looks set to be a lot worse (with the IMF currently forecasting a contraction somewhere in the region of 5%, and forecasts of up to minus 7% not seeming exaggerated).

What we seem to have here is "engine faliure" rather than mere "magneto problems" (using Claus Vistesen's memorable phrase for a very similar situation in the Japanese economy, and it would be nice if the current crisis could serve as the stimulus for an open, and "in the real world" debate about why this is. So some part of the traditional mechanism of economic transmission seems to have been broken, and the "second leg" of the economic cycle, the domestic consumtion driven one, seems no longer to work. Long term GDP growth rates in the German economy are clearly falling, and the decline looks clearly set to continue.

And as Will Hutton points out to Paul Krugman - on top of the massive drop in economic activity there is a huge potential banking crisis looming over the horizon. The IMF have warned that Germany could be looking at over $500bn of writedowns. German banks - according to Hutton - hold a trillion dollars - maybe more - of maturing collateralised debt obligations. And as Krugman says:
It’s Germany on a global scale that is the concern. We worry about the drag on world demand from the global savings coming out of east Asia and the Middle East, but within Europe there’s a European savings glut which is coming out of Germany. And it’s much bigger relative to the size of the economy.

So we know that the German economy (like its Swedish counterpart) is now by and large a very unstable cocktail of accumulating surpluses and using them to finance risky lending elsewhere. But why and how exactly has Germany gotten into this mess. On this there is largely silence. The falling and ageing population issue couldn't have anything to do with it, now could it?

Banking Problems In Southern Europe Send The Whole World Running For Cover

Well that so called investor "risk appetite" took a surprise hit yesterday (and from an unexpected quarter). It wasn't the worries about US fiscal deficits that caused the panic, but problems in the European banking system. Gwen Robinson reports:

Risk appetite suffered a sharp deterioration on Monday as fresh uncertainty about the global economy prompted investors to shift from equities, commodities and emerging market assets into the perceived safety of government bonds and the dollar. Markets were further unnerved by warnings on the economic outlook from the head of the IMF and an ECB report saying eurozone banks face another $283bn in writedowns on bad loans and securities this year and next.

As Izabella Kaminska notes, it is Southern Europe that is now getting all the attention.

This time it’s the turn of 25 Spanish banks, all of whose senior ratings were on Friday downgraded by Moody’s. Banco Santander, of “we’re so strong we’re actually going to expand through the crisis” fame, meanwhile, remains under review for possible downgrade.......

Also, this one in Bloomberg:

A Spanish fund planned to aid lenders will be set up with 9 billion euros ($12.6 billion) and will have the capacity to raise an additional 90 billion euros in debt, Finance Minister Elena Salgado said. The government is still working on the details of the plan, which will need the approval of parliament, Salgado told a news conference in Madrid today after a weekly Cabinet meeting. The government would raise the initial 9 billion euros with a debt issue, she said, adding that there was “no hurry” as “there is not one entity in difficulty.”

As unemployment and bankruptcies surge, bad loans at Spain’s banks rose 4.27 percent of total credit in March, the highest since 1996, compared with 1.2 percent a year earlier.

But as Isabella detailed: "Moody’s also noted that a significant government capital injection - which apparently has been discussed for some time now by the Spanish government and the banking sector — could prompt subsequent upgrades of some BFSRs. "

And guess what else it might prompt, more downgrades in Spanish sovereign debt, that's what it might prompt. Economy Minister Elena Salgado was widely quoted in the press last week, giving an estimate of 9.5% total fiscal deficit for 2009 (not bad my guess of 9% back in February, I think). But they are still hoping for a contraction this year of only minus three percent, and this seems very optimistic, so the outcome will surely be a deficit in double figures.

This, in my view, is the last year that the financial markets will pardon such a deficit from Spain, and we will now be under fiscal pressure as well as relative price pressure. Essentially, I agree with Krugman (or should that be, given the NYT links, Krugman agrees with me) and what we need in Spain is an "internal devaluation" of about 20% to jumpstart the economy - and this is 20% vis a vis Germany, where they are also having deflation, so the size of the correction is very large. And at this point - August will mark the second anniversary of the commencement of what looks like becoming Spain's "lost decade" - we haven't even started.

And Greece is also moving towards centre stage, as the FTs Kerin Hope details in this article:
After a decade of explosive loan growth triggered by Greece’s entry to the eurozone, the country’s banks are experiencing the downside of a financial cycle for the first time as the economy stutters in the global downturn.

Exports are declining, the tourist season has got off to a poor start and the Greek economy is projected to shrink by about 1 per cent this year, according to the International Monetary Fund. Years of excessive spending have pushed up the public debt to almost 98 per cent of gross domestic product.So far the banks have shown some resilience, assisted by a €28bn government support package that included a €5bn capital injection in preferred shares, and there have not been any government bail-outs of individual banks.........

However, the situation may be about to worsen with analysts forecasting bad loans will rise this year from 3.8 per cent to about 6 per cent before peaking in the first half of 2010. Meanwhile, Fitch, the ratings agency, last week warned the banks’ performance for the rest of the year would likely be hit by higher loan impairment charges.

So the world seems to work like this. Latvia gets battoned down for a few months via a few billion in loans from the IMF and the EU Commission. As a result, the Baltics now become yesterday's story - till they aren't again, of course. And we move on, as I more or less feared, and its time to begin to focus on Southern Europe again (while Eastern Europe deteriorates sufficiently to make it back into the headlines). I think people can only keep so many things in their head at any one time.

Basically the whole EU system seems to be in denial on what is happening at the moment. The markets have been focused on the East, but they are now starting to wake up to the fact that the South is still here, and when this "matures" we will have a full blown financial crisis, that is for sure. At that poiunt the Spanish and Greek governments will effectively lose control of the situation, just as they have done in Latvia and Hungary.

This is one of the reasons I am following Latvia closely. Basically what is happening in the East is a sort of "dry run" for what is going to have to have to happen in the South. The whole package, from "fiscal austerity" as a tool to attack recessions, to "internal devaluation" via price and wage deflation is about to be applied in the South as a path towards restoring export competitiveness and economic growth.

There has been a lot of talk, of late, about the contagion danger from Latvia, but few seem to consider the possibility that - given the way the EU itself is putting its credibility on the line in the Latvian case - if finally Latvia folds (and devalues, as I feel it must), then the contagion problem could leap straight to the South from the East. Obviously Romania is looking very vulnerable to anything that happens virtually anywhere, but Spain looks a lot more vulnerable to me at this point than either Poland or the Czech Republic, due to the massive external financing requirement.

Basically investors have now started to remember that Greece and Spain still exist. I suppose we will now see the crisis zigger-zagger across from the South to the East and back again, with the German real economy receiving body blows on both counts in the middle.

Meantime in Berlin and Frankfurt they seem to be mainly worried about the US fiscal deficit at this point. Stange what makes people tick.

Wednesday, June 10, 2009

David Takes On Goliath and Loses: The Ferguson - Krugman Exchange

"As long as excessive debt is not digested, both monetary and fiscal policies are inefficient. There is not much of an alternative. Either to let the economy collapse, in order to reduce debts, and then use fiscal policy to revive it, or inundate the insolvent economy with public credit, to avoid the collapse, and loose the ability of fiscal policy to pull it out of a prolonged lethargy. Either a horrible end or an endless horror."
After the Crisis: Macro Imbalance, Credibility and Reserve-Currency: André Lara Resende

Well, I think the title to this post makes my view on the high-profile shenanigans we are currently witnessing on the part of two widely respected contemporary intellectuals clear enough, even if Paul would probably respond that he is perfectly well able to take care of himself, thank you very much. Nonetheless, looking at the way the tone of his most recent and most public debate with Niall Ferguson has deteriorated (yes, it is Niall I'm talking about here, and not Sir Bobby, although sometimes even I have my doubts), let me confess, I am not entirely convinced on this point (Niall Ferguson's argument can be found summarised in his Financial Times Op-Ed here, and in his rejoinder letter to Martin Wolf reproduced by the FT Alphaville's ever interesting Izabella Kaminska here, while Paul Krugman's "input" to the debate can be found here, here, and here).

So, since the thunder and lightening that such high profile exchanges generate tends to obscure more than it reveals, let me be so bold as to add my own 2 centimes worth - even if, apologies in advance, the whole affair ends up being most terribly "wonkish". If you want to save yourself a good deal of trouble, and heart searching, the central point is a simple one: are long term US interest rates rising because investors are worrying about having to buy so much public debt (as K would point out, what else were they thinking of doing with the money - which isn't really "money" at all, but, oh, never mind), or are they rising because investors expect the time path of US short term interest rates to move steadily upwards? It's as easy, or as hard, as that. So now, you decide!

Tuesday, June 09, 2009

More "Green Shoots" - Latvian Exports, German and Japanese Capital Goods Output

Well today there was plenty of fresh news for collectors of "green shoot" negatives. Starting in Latvia, where the Statistics Office announced that exports were down by 30.9% year on year in April (the fastest rate of decline to date), while imports dropped a massive 45.6%. It looks like the Latvian Parliament is set to pass another round of budget cuts today, in the hope that these will bring back growth (how is not clear). All I can say is "these poor people", I do wish those who were advising them had a better idea what they were doing.

In Luxembourg today, Latvian Finance Minister Einars Repse told reports: "We will be cutting no less than 10 percent of our GDP over three years but this will bring our imbalances down and pave a very solid basis for recovery,". He means, of course, expenditure equivalent to 10% of GDP - which means 3.3 percent a year. The mystery is, how such cuts will help restore growth. All West European economies are increasing spending, following the normal intuition of supporting an economy in time of weakness. And remember, Latvia has not gotten into this mess by excessive government spending. Back in 2007, before all this started, debt to GDP was around 10%. It's the money lost by the banking sector (with Parex in the forefront) which is causing all this. Oh, I know, I know, they are following the new orthodoxy:

In emerging market countries with debt overhangs, the “Keynesian” effect of fiscal adjustment is likely to be outweighed by “non-Keynesian” effects related to expectations and credibility. Non- Keynesian effects have to do with the offsetting response of private saving to policy-related changes in public saving. In particular, if fiscal adjustment credibly signals improved public sector solvency, a fiscal contraction could turn out to be expansionary, as private consumption rises based on the view that future tax hikes will be smaller than previously envisaged.
IMF - Hungary, Request for Stand-By Arrangement, November 4, 2008
But I still have no idea of the exact mechanics of quite how people imagine all this can work in the current environment, when the private sector is also totally loaded up with debt. Meanwhile exports go down and down, falling from 288 million Lats in March, to 274.2 million in April.

The only saving grace here was that the goods trade deficit was also down, and fell from 124.6 million Lat in March to 96.9 million Lat in April.

German Capital Goods Output Falls

Let's start with the story so far. According to GDP data for the first three months of this year, German companies invested 16.2% less in machinery, equipment and vehicles in Q1 than they did in the last quarter of 2008.

But perhaps this fall in investment bottomed out after the first quarter? Well, apparently not, since according to the Economy Ministry in Berlin today, German industrial output declined again in April (over March) with the lead role being taken in the fall by investment goods. Manufacturing output was down 2.9 percent from March (when it rose 0.6 percent), and from a year earlier by 24.2 percent (when adjusted for working day changes).

Output of investment goods such as machines slumped 6.4 percent in April from the previous month, and by 29.6 percent year on year (following a 23.9 percent drop in March). Production of intermediate goods fell 1 percent and manufacturing output slipped 2.9 percent from March. Output of consumer goods rose 0.5 percent in April from the previous month. Energy production was up 5.8 percent and construction output rose 0.5 percent.

And despite the fact that many were putting a brave face on yesterday's April industrial orders data, orders for investment good were down month on month by 4.4 percent in April (following a 5.6 percent rise in March over February.

German industrial orders, a key indicator in Europe's biggest economy, were stable in April compared with the previous month, the economy ministry said on Monday. Orders had risen strongly in March, their first rise in six months, and the ministry said the latest reading, a change of exactly zero percent, showed a "noticeable improvement in the medium-term perspective" for German industries. The March figure was revised slightly higher moreover to a gain of 3.7 percent from a previous estimate of 3.3 percent. Analysts were divided on what the steady result meant, but most saw the glass as half-full as Germany struggles to pull out of its worst post-war slump.

Export orders for investment goods were down 5.1 percent following a 9.1 percent increase in March. Year on year, export orders for investment goods were down no less than 46 percent (down from only a 34.9 percent annual drop in March). Anyone who can see signs of a developing recovery here - the German Technology Ministry said they saw signs of a "noticeable improvement in the medium-term perspective" (see citation above) - might like to explain to me how, since I certainly can't see it.

Similar results were found in a survey by Frankfurt-based trade association VDMA. German plant and machinery orders dropped an annual 58 percent, the most since data collection started in 1950, after falling an annual 35 percent in March, according to the association. Export orders were down 60 percent while domestic demand dropped 52 percent. The VDMA is forecasting a decline in orders of between 10 percent and 20 percent for the year as a whole.

“Signs of a trough aren’t recognizable yet,” according to VDMA Chief Economist Ralph Wiechers.

Japan A Similar Picture

Japan’s economy - just to remind ourselves - shrank at a record rate in the first quarter as exports collapsed and businesses drastically cut back on investment spending (an almost identical picture to the German one). Gross domestic product fell by an annualized 15.2 percent in the three months ended March 31, following a revised fourth- quarter drop of 14.4 percent. The economy contracted 3.5 percent in the year ended March 31, the most since records began in 1955.

As in Germany, employment and consumer spending held up reasonably well - only dropped by 1.1 percent year on year. But business investment was down a record annual 10.4 percent, and a massive 35.5% over the last quarter. And companies are likely to keep cutting spending because the decline in external demand has left factories operating well below capacity level, and semi idle workforces can only be retained for so long.

While industrial output bounced back a bit in April, general machinery products continued to fall, and were down 14.5 percent month on month, a sign that managers remain wary of upgrading factories and equipment before they are convinced an economic recovery has taken hold. If you look at the chart below (click on image for better viewing) you will see that the year on year drops (indicated by black triangle) in machine output continued to be massive in April, with production of general machinery down almost 50 percent on the year.

And the future continues to look very bleak. Japanese companies plan to slash capital-investment spending by 16% in 2009 according to the business daily Nikkei, the steepest drop in the history of their survey. Companies suggested they expect to spend 22.7 trillion yen ($230 billion) on capital investments in fiscal year 2009, a 4.28 trillion yen decrease from a year ago, according to the survey which covered 1,475 firms.

Previously the steepest cut in spending was a 12% decline in 1993. This year's decline marks the second year in a row that capital-investment spending dropped.The Nikkei reported that with 15 of 17 manufacturing sectors planning capital-investment cuts, spending by manufacturers overall is expected to drop a record 24% to a total of 11.7 trillion yen.

According to the survey, electronics firms will spend 3 trillion yen, a 29% drop from a year ago, and automakers said they'd spend 2.3 trillion yen, a 33% decrease. Among manufacturers, only the food and pharmaceutical industries intend to increase spending.

And the conclusion of all this? Well it is clear that there will be no recovery lead by export dependent economies like Japan and Germany. But this is not the big problem. The big problem is who is actually going to lead the world forward with a new round of import growth? At the present time this is a question without an answer.

And talking of which, I can only agree with this sentiment from Brad Setser:

"Like everyone else, I am curious to see what China’s May trade data tells us. If China truly is going to lead the global recovery, China needs to import more – and not just import more commodities for its (growing) strategic stockpiles."

Brad, you will find if you follow the link over, has been busy digging for green shoots over in the Korean trade data, but he had a hard time finding them.

Green Shoots In Germany and Estonia?

Well, I am busying myself this morning scratching around looking for green shoots in Turkey. But even as I was digging for these I couldn't help notice this coming in over the radar from Germany, courtesy of Bloomberg:

German exports fell more than economists forecast in April as the global crisis restrained demand, keeping Europe’s largest economy mired in a recession. Sales abroad, adjusted for working days and seasonal changes, fell 4.8 percent from March, when they rose a revised 0.3 percent, the Federal Statistics Office in Wiesbaden said today. Economists expected a 0.1 percent decline in April, according to the median of 10 estimates in a Bloomberg News survey.
So German exports have not touched bottom yet - they are still falling. Since the German economy is export dependent, then this implies the obvious, the German economy is still contracting. I don't think anyone ever doubted this, but looking at the way some of the material has been presented recently, it wasn't always clear.

Indeed year on year, exports fell by 22.9%, the fastest rate so far, although since these annual stats are not working day corrected I wouldn't read too much into that just yet, since you really do need to average across March and April due to the Easter impact.

Another country where rather unsurprisingly we aren't seeing too many green shoots at the moment is Estonia, and only today the statistics office reported that exports decreased by 38% and imports by 41% (year on year) in April.

As a result the Estonian trade deficit rose for the second month running, and hit 1.8 billion kroons. So what we are seeing here is a distinct move in the wrong direction, on both counts.

We also learnt from the Estonian stats office today that GDP contracted by 15.1% (year on year) in the first three months of this year - a figure which was revised down from the earlier flash estimate of 15.6%.

Compared to the 4th quarter of last year, seasonally and working-day adjusted GDP decreased by 6.1% (more on all this in another post).

Finally on the green shoots front for today, we could note that Hungary's industrial production plummeted in April by 25.3% (year on year) according to working day adjusted data released by the stats office. This compares with a year on year contraction of 19.6% in March.

Month on month there was seasonally and working day adjusted drop of 5.1% in April, following 4.5% growth in March. So again, output is still falling, and no bottom has been reached.

This latest Hungarian data is particularly unpalatable following a number of reports which had been left open the possibility that the downturn in the Hungarian economy had ground to a halt, or at least staretd to decelerate. If industrial output shows similar weakness in other East European countries then this does not augur well for future German and eurozone output, since Hungary plays a significant role in the early stages of the European manufacturing production chain.

Monday, June 08, 2009

The European Parliament election of 2009: the "summer of discontent" poll?

by Manuel Alvarez-Rivera, Puerto Rico

An election is currently taking place in the 27 member countries of the European Union, to choose 736 members of the European Parliament for a term of five years. Some countries went to the polls on June 4, 5 and 6, but most are holding the election on Sunday, June 7. In addition, one of the smallest members of the EU, the Grand Duchy of Luxembourg, will hold a parliamentary election simultaneously with the EP poll.

The European Parliament 2009 elections website bills the event as "27 countries, one election," but it would be more appropriate to speak about 27 separate elections that happen to be held simultaneously across a four-day period. Even though all EU countries use proportional representation to allocate EP seats since 1999 (when Great Britain proper switched from first-past-the-post to PR), the rules vary from country to country, and the U.K. actually uses two electoral systems: closed party-list PR for England, Scotland and Wales; and the Single Transferable Vote (STV) for Northern Ireland's three EP seats (the latter since 1979, when the European Parliament became a popularly elected body).

In addition, European elections tend to be dominated as much by national issues as by European issues - hardly surprising in light of the fact that the elections are contested by not by EU-wide parties but by the political parties active in each member country, which subsequently form parliamentary groups in the European Parliament that reflect Europe's major political currents (i.e. Socialist, Liberal, Conservative, Green and so on). In fact, European elections in many countries are little more than glorified mid-term elections, or in some cases (such as Bulgaria, the Czech Republic and Portugal) dress rehearsals for general elections to be held later this year.

Meanwhile, in some countries this year's European poll has been overshadowed by national scandals, such as the ongoing M.P.s' expenses controversy in the United Kingdom, and more recently the publication by the Spanish newspaper "El País" of racy photos taken in the private villa of Italian Prime Minister Silvio Berlusconi - who already faces a messy divorce and had previously secured a ban over the publication of the controversial pictures in Italian news media.

Just as important, the EP vote is taking place in the middle of a global financial crisis that has hit the newer members from Eastern Europe particularly hard. The now-wobbly economies of many of these countries appears to have reinforced a growing sense of "buyer remorse" - or more accurately, admission remorse - among large sectors of public opinion in many Western European EU members, which already had serious reservations about bringing in countries that had considerably lower standards of living and of governmental transparency - in particular Romania and Bulgaria, the EU's two newest (and poorest) members.

As it happens, the economic hardships brought about by the ongoing financial crisis appear to have created a fertile environment in many countries for right-wing populist parties preaching a thinly veiled racist and xenophobic discourse, typically anti-immigration, anti-Islamic and often anti-East European as well as anti-EU. These parties, which have developed a motivated following, may also benefit from the low voter turnout that has characterized recent European elections in most member countries.

The declining turnout rates in European elections constitute something of a paradox, as the European Parliament has actually become a more powerful institution over the course of the last three decades. However, an Eurobarometer survey (EB71.1) carried out in January and February of this year indicates that while a slight plurality of respondents believes the EP's role within the European Union has been strengthened during the last decade, nearly as many say it has stayed the same or has been weakened.

Moreover, the European Parliament does not yet play a role as powerful with respect to the European Commission - the EU's executive - as that of national parliaments relative to their respective governments: for example, EP approval is not always necessary for EU legislation. The less-than-straightforward role of the European Parliament within the EU - somewhat reminiscent of that of a 19th century parliament under a limited monarchy - appears to be a major factor contributing to the low turnout: in the Eurobarometer survey, an insufficient understanding of the EP's role was cited as the main reason for not voting in European elections.

However, a large plurality of Eurobarometer respondents indicated they would like to see the European Parliament play a more important role than it currently does; in fact, the EP's role will be significantly strengthened if the Lisbon Treaty is ultimately approved - a development that might raise the institution's relatively low profile and pave the way for higher turnout rates in future European elections. In the meantime, the sad truth remains that for many EU voters, EP elections don't even register on the radar - less than a third of respondents was aware an European election was due this year, according to the Eurobarometer survey - or simply aren't viewed as relevant: the perceptions that voting in the event would not change anything, and that the EP did not sufficiently deal with problems concerning respondents were the second and fourth most frequently cited reasons for not voting in the election; not being sufficiently informed to go to vote ranked third.

European election results were not supposed to be available until Sunday evening, but in an unprecedented breach of rules, the outcome of the European vote in the Netherlands became available after the polls closed there last June 4, much to the displeasure of EU officials; preliminary figures have the right-wing populist Party for Freedom (PVV) in a strong second place, just behind the Christian Democratic Appeal (CDA) party of Prime Minister Jan Peter Balkenende. Meanwhile, the Labour Party (PvdA) - the junior partner in Balkenende's coalition government - suffered heavy losses, but the opposition, social liberal Democrats 66 (D66) soared to their best EP result since 1994. However, the turnout rate stood at just 36.5%, well below the 80.4% turnout in the country's 2006 general election.

There is no doubt the Party for Freedom - whose leader, Geert Wilders faces prosecution for making anti-Islamic statements - has tapped into a strong undercurrent of discontent in the Netherlands (at least among those bothering to vote in the election there), but it remains to be seen how strongly and in what manner will that discontent manifest itself in other EU countries.

Tuesday, June 02, 2009

May Manufacturing Improves Again According To The JPMorgan Global PMI Report

Global factory activity continued to improve in May amid growing optimism that the worst of the recession may be over. Output contracted at a much less ferociously than at the start of the year in one economy after another, and this month three countries actually registered output growth - India, China and Turkey. The JP Morgan global manufacturing index (PMI) rose to 45.3 in May from 41.8 in April, the highest level in nine months, although still a long way below the 50.0 mark dividing growth from contraction. The component indexes for output and new orders were both running at much higher levels than in April.

However, the headline PMI is still at a very low level by historic standards, and well below one which would be consistent with outright recovery. On the other hand, it is clear that the easing of the worldwide manufacturing recession which we have been seeing over the past two months has continued and has been substantial. The month-on-month gains in the PMI, output and new orders indexes in April and May are the greatest in the series history (which is not that surprising follow a series of record falls). All of the national indexes for these variables rose during the latest survey period.

Among the countries surveyed (see foot of post for details) only India, China and Turkey reported increased production. Japan (slowest for 13 months), the United States (weakest fall in current nine-month downturn) and the United Kingdom (slowest drop in a year) saw substantial easings in their respective rates of contraction. Although the Eurozone vastly underperformed relative to the global average, its output index rose to the greatest extent in survey history and to an eight-month high.

New orders contracted for the 14th month running in May, the longest period of contraction in the survey history. However, the Global Manufacturing New Orders Index climbed to 48.6, its highest level in a year. The rate of decline in global trade slowed sharply to its weakest since last September. China and India reported increases in total new orders for the second successive months in May. The U.S. and Turkey were the only other nations covered by the global survey to report gains, with new business rising for the first time in one-and-a-half years in the U.S. and for 17 months in Turkey.

Although May data pointed to substantial jobs losses, the rate of decline eased to a six-month low. Employment has now fallen for 14 successive months. Almost all of the nations covered reported lower staffing levels, the exceptions being India (slight gain) and China (no change). Among the other countries, only the U.S. and Austria failed to report slower rates of decline. The pace of job cutting eased to five, six and seven-month lows in the Eurozone, Japan and the U.K., respectively.

At 40.8 in May, the Global Manufacturing Input Prices Index posted its highest reading since October 2008 but remained below the neutral 50.0 mark for the eighth month running. Only India and Russia saw increases in costs. The rate of decline eased sharply in the U.S.

What follows is a very extensive country-by-country, blow-by-blow account assembled from across the national reports. It is probably too dense to read at one sitting, but you can simply pick and tick the regions and the countries that interest you, as I do think the monthly manufacturing PMIs give a reasonable picture of what is actually going on, as opposed to what some would like to believe is going on.



Sweden's seasonally adjusted purchasing managers' index rose to 43.7 in May, climbing for the fifth consecutive month, according to the reprot from the survey sponsors Silf and Swedbank.
The May result compared with a 38.8 reading in April and was considerably above consensus expectations for a 40.2 result.


The Markit Eurozone Final Manufacturing PMI posted 40.7 in May, up from 36.8 in April and above the earlier flash reading of 40.5. The rise of 3.9 points in the PMI was the largest seen since the survey began in June 1997 and raised the index further above February’s record low to hit a seven-month high. However, the PMI extended its run below the no-change mark of 50.0 into a 12th successive month, a sequence unprecedented in the series history.

National PMIs stayed firmly in recession territory across all of the member states covered by the survey. However, the indexes for Germany, Italy and Spain all rose by the largest amount in their respective series histories. Greece posted the highest reading overall.

The rise in the PMI was driven by a record easing in the rate of contraction of manufacturing output, which fell at the weakest pace since last September and slower than indicated by the flash estimate. Rates of contraction eased most sharply in Germany, Italy and Greece (which also posted the slowest decline overall). The consumer, intermediate and investment goods sectors all saw rates of output contraction ease during the month.

The rate of decline in new orders was the weakest since August 2008 and slower than the earlier flash estimate. All countries covered by the survey saw a shallower rate of retrenchment of new orders. Order flows to investment goods producers were especially weak, although the rate of decline in this sector was much slower than in recent months. Consumer goods was the only sector to report a faster rate of reduction in new work than one month ago.

May data pointed to a 12th successive monthly decline in manufacturing employment. The rate of job cutting was much slower than in April, but slightly faster than the flash estimate. All of the countries covered by the survey reported marked reductions in employment, but only Austria saw staffing levels drop at a faster pace than in April. Intermediate and capital goods producers continued to report the greatest decreases in staffing levels.

Export order volumes continued to fall in May, with producers of capital goods hit especially hard. However, the overall rate of decline eased to its slowest since last September and was less steep than that signaled by the flash estimate. Rates of decline eased across all of the member states covered by the survey, with the most noticeable slowdowns signaled for Germany, Greece and the Netherlands.

Input costs fell for the seventh month running, albeit at the second slowest pace during that period and to a lesser extent than signaled by the flash estimate. Cost deflation eased in all of the nations covered. The sharpest decrease in costs was reported by France and the weakest by Greece.

Although the rate of decline in average output prices eased to a four-month low, it remained severe and was slightly faster than the earlier flash estimate. Falling output prices were blamed on weak demand and strong competition. Of particular note, Germany reported a record drop in prices charged. May data pointed to survey record reductions in stocks of both raw materials and finished goods. Germany reported the greatest depletion in both cases, and the stock reduction was again most pronounced in the capital goods sector. Buying activity was cut back further, although the rate of decline in quantities of purchases eased for the third successive month.

Looking ahead, the combination of record reductions in inventories and a slower rate of decline of new orders meant the orders-to-inventory ratio – which tends to lead the production cycle – rose to an 18-month high in May (and above that calculated based on flash estimates).


Germany's manufacturing PMI rose to 39.6 in May. That compared with 35.4 in April and was stronger than the 39.1 economists had expected. The improvement mainly reflected slower falls in output, new orders and employment than in April. Although the PMI hit a seven-month high, the index was still well below the neutral 50.0 mark. Deteriorating operating conditions have now been recorded for 10 months running, the longest period since 2002-2003.

May data signaled a sharp easing of the rate of decline in manufacturing output. Reduced rates of contraction have been recorded in each month since January’s survey record fall. Anecdotal evidence suggested that a more moderate drop in new orders supported production levels in May. The seasonally adjusted index measuring new order volumes recorded one of its largest ever one-month gains in May, to signal that new work contracted at a much slower rate than in April.

Manufacturers noted that price discounting and improved sentiment about the economic outlook had supported client demand. New export orders also declined at a slower pace, with the rate of reduction the least marked since September 2008.

A steep rate of job shedding persisted in May as firms continued to implement staff restructuring in response to excess capacity at their plants. Reports from panelists also pointed to a general aversion to hiring in May, leading to delays in the replacement of departing staff. Employment levels have now fallen for eight months running, but the rate of decline eased slightly since April’s survey record.

Substantial destocking continued in May as firms adjusted to lower demand and sought to cut costs through improved stock management. Both stocks of purchases and finished goods inventories declined at their fastest rates since the survey began in April 1996.

Average cost burdens dropped sharply in the latest survey period, albeit at the least marked rate since last November. This led to another marked drop in factory gate prices, with the rate of decline hitting a new survey record in May.


France's headline manufacturing PMI climbed to a nine-month high of 43.3, from 40.1 in April. The PMI was boosted by slower falls in output, new orders, employment and stocks of purchases, while suppliers’ delivery times also exerted a weaker negative influence.

Manufacturing production fell for a 12th successive month in May. Although still sharp, the rate of decline eased further from February’s series record and was the least marked since last August. The weaker drop in output mirrored a similar easing in the rate of contraction of new orders. The latest decline in new work was the slowest in 11 months, amid reports of a stabilization in demand following the severe weakening seen in the second half of 2008 as the financial crisis worsened.

Data suggested that demand had firmed from both domestic and foreign clients, as the latest decrease in export orders was the smallest for eight months. In a further sign of recovering demand, manufacturers’ stocks of finished goods declined at the fastest pace in the survey history in May. It was the seventh fall in successive months, and suggests that the inventory cycle may soon reach a point at which production will need to be stepped up in order to rebuild depleted stocks. Reflecting the smaller fall in new orders, backlogs of work decreased at a weaker pace in May. The latest drop in outstanding business was the least marked in eight months.

Employment also declined at a slower (albeit still marked) rate, with the pace of job shedding easing to a seven-month low. Firms’ purchasing activity contracted at a milder rate in May, mirroring the trend in output. That said, the decline in input buying was still substantial and contributed to another marked fall in stocks of purchases.

A number of panelists linked lower preproduction inventories to efforts to improve cash flow. Lower demand for raw materials allowed suppliers to deliver purchased items faster on average in May. Consequently, lead times shortened for a ninth consecutive month. Weak demand also led a number of vendors to offer discounts and this, combined with lower prices for a number of commodities on global exchanges, resulted in a further steep reduction in average purchasing costs. Output prices decreased in May as manufacturers cut their tariffs in response to intensifying competition. The rate of decline remained sharp, despite easing to a four-month low.


Operating conditions in the Italian manufacturing sector continued to deteriorate at a significant pace in May. Nonetheless, rates of decline registered for production, new orders and employment all eased, while stocks of postproduction goods fell for a second successive month. The headline Markit/ADACI manufacturing PMI rose from 37.2 in April to 41.1 in May. While this represented the greatest month-on-month gain in the history of the series, the index continued to register a considerable monthly deterioration of conditions and the level remained well below that recorded before the collapse of Lehman Brothers in September.

Further falls in new business continued to suppress production volumes during May. Nonetheless, activity at manufacturing plants fell at the weakest pace since September 2008. Anecdotal evidence suggested that weak demand from both foreign and domestic clients (as a consequence of the poor economic climate) resulted in the latest decline in new order books. Even so, the deterioration of overall demand was the weakest in eight months. Italian manufacturers continued to trim staffing levels during the latest survey period. However, mirroring the trend in workloads, the rate of job shedding eased from April. Redundancies and the non-replacement of leavers were cited as methods of workforce streamlining.

Destocking remained evident during the latest survey period. Post-production inventories fell for the second straight month during May, although the rate of decline was fractionally weaker than seen in the previous survey period. Average prices paid for inputs fell for the seventh month in a row during May. Nevertheless, the rate of decline was the weakest in the current period of falling costs. Survey respondents indicated that lower purchasing activity had intensified competitive pressures at suppliers – resulting in lower list prices. Firms also noted that the strong performance of the euro (notably against the U.S. dollar) had kept average costs down.

Savings from lower input prices were swiftly passed on to clients in the form of lower factory gate prices during May. Panel members reported that the economic downturn had markedly increased competition, forcing manufacturers to reduce charges. Despite lower costs, marked falls in workloads resulted in a further drop in firms’ purchase volumes during May. Subsequently, suppliers’ delivery times shortened further and pre-production inventories fell at the fastest pace in the history of the survey.


Germany's manufacturing PMI rose again in May, hitting 39.8. That compared with 34.6 in April. The improvement mainly reflected slower falls in output, new orders and employment than in April. Although the PMI hit a nine-month high, the index was still well below the neutral 50.0 mark. Deteriorating operating conditions have now been recorded for 17 months running.

May data signaled a sharp easing of the rate of decline in manufacturing output. Reduced rates of contraction have been recorded in each month since December’s survey record fall. The seasonally adjusted index measuring new order volumes recorded one of its largest ever one-month gains in May, to signal that new work contracted at a much slower rate than in April.


The May manufacturing PMI eased back sharply, hitting the slowest contraction in seven months due to improvements in the generall outlook. The Markit Greece Manufacturing PMI index showed that the rate of contraction in production, new orders and employment weakened.

The headline PMI was the highest since last October, rising to 46.1, sharply up from the 40.9 registered in April.

The decline in incoming new orders fell back slightly in May, and was the weakest recorded during the current recession. However, those surveyed reported that difficult operating conditions persist, due to the weakening in demand both domestically and in foreign markets.

Employment, purchasing activity and stock levels all fell significantly, but at a slower rate than in April.

Eastern Europe


The May survey of Russian manufacturing business conditions from VTB Capital provided further evidence that the second quarter contraction will be much slower than the one registered in the first three months of 2009. The headline seasonally adjusted Russian Manufacturing PMI has been nudging up continuously from December’s record low of 33.8, and stood at a seven-month high of 45.3 in May. The month-on-month gains in the PMI over the past three months have averaged 1.6, following a record 6.2 rebound in February.

Although the rate of decline in manufacturing slowed further in May, the sector is still experiencing a longer and more pronounced contraction than that seen during the financial crisis of 1998. At that time the PMI was in negative territory for seven successive months in negative territory. The current run now extends to 10 months – and at a more substantial average pace of contraction.

Underpinning the ongoing contraction in output was a sustained fall in incoming new work in May. Anecdotal evidence linked lower receipts of new business to a combination of subdued underlying demand and difficulties experienced by clients in securing sufficient credit. However, the rate of decline was the slowest in the current eight-month sequence. The pace of contraction in new export orders also slowed in May. Excess capacity in manufacturing remained in evidence in May, as outstanding business declined further. That said, the rate of reduction was the slowest since April 2008.


The fall in manufacturing in two of the EU's largest East European economies slowed in May. Despite a certain stabilisation in credit markets and the appearance of some small 'green shoots', the EU's eastern front is still beset by a sharp industrial contraction, due to increasing export dependence accompanied by a collapse in euro zone demand. There is some evidence that improving sentiment in western Europe have produced slightly brighter expectations for industrial performance, particularly in Poland, where exports account for only about 45 percent of the economy, versus around 70 percent for the Czech Republic.

The Polish manufacturing PMI edged up to 42.55, from 42.1 in April, signalling the weakest pace of decline since October.

The Czech Republic

Czech PMI also crept upwards - to a seven-month high of 40.5, from 38.6 in April. The Czech manufacturing sector continues to experience a sharp contraction mid-way through Q2, although the worst of the industrial downturn may now passed. The PMI data also support the view that Poland is at this point weathering the crisis better than more export-reliant neighbours such like the Czech Republic.

However, the worse-than-expected growth and industry data released last month, mean that these very slight upticks do not give much hope for a rapid, robust recovery, even in Poland which was one of the few countries to actually show year on year growth in the first quarter (0.8 percent) although the economy almost certainly contracted on a seasonally adjusted basis when compared with the last three months of 2008.

Data released at the end of last week showed Czech industrial output fell by 23 percent in April, returning to a near record pace of decline after a brief respite in March. That followed a worse-than-expected year on year fall in gross domestic product of 3.4 percent in the first quarter.

Economists have also warned that rising job cuts at firms, a contraction of investment, rising bankruptcies, and very weak credit growth were also taking a toll on the economy, preventing an early rebound from the crisis. Indeed Czech media reported only last Monday that truck maker Tatra will cut 450 of its 2,750 workerforce. Thus while expectations are improving significantly actual operating conditions are not.


Hungarian manufacturing contracted for a record eighth consecutive month in May as the economic recession deepened. The manufacturing PMI came in at 45.3 in May - up from a revised 40.6 in April, according to Halpim - the Hungarian Association for Logistics, Purchasing and Inventory. This is the second month in which the contraction has eased.

Hungary’s industrial production decline slowed in March, the latest month for which data is available, as the global economy showed signs of recovery, helping demand for exports. Output fell a workday-adjusted 19.6 percent from a year earlier after an annual 25.2 percent decrease in February.


Turkish stocks hit an 8-month-high on Monday, rising along with other global bourses on encouraging data from China, and on the increasing evidence of green shoots at home. Turkey's manufacturing PMI rose in May to 51 from 44 in April, according to the Markit manufacturing PMI survey. A whisk above the 50 dividing line, but enough to put Turkey - along with India and China - in the very illustrious group of economies whose industrial sectors are now expanding.



The recent improvement in Japan's industrial activity appears to have continued in May according to the latest reading from the Nomura PMI survey, since while the survey found that activity in the Japanese manufacturing sector fell for the fifteenth successive month, the drop in output was the smallest seen in just over a year. I wouldn't attach too much importance to the discrepancy between the PMI survey and the actual output outcome (production was up in April over may according to Minstry data) at this point, since the survey methodology (which is normally pretty reliable) is probably struggling a little to handle the severity of the shock in the manufacturing sector and calibrate results. The general direction of an easing in the annual rate of contraction is in harmony on both readouts.

In fact, the seasonally adjusted headline Purchasing Managers’ Index (PMI) rose sharply in May to 46.6, from 41.4 in April, pointing to the slowest deterioration in operating conditions for nine months.

May’s survey also showed that incoming new orders received by Japanese manufacturers fell for the fifteenth month running. But again the rate of decline continued to ease from December’s record drop to the smallest contraction in the weakest in the current sequence. While foreign order levels continued to fall, they did so at a much slower rate as improved orders from China continuing demand weakness in other regions (such as the US and Europe). May’s survey pointed to a sixth successive monthly decline in the prices charged by Japanese manufacturers for finished goods.

Although still sharp, the latest drop in output charges was the weakest since last December. Strong competitive pressures and falling raw material prices were cited as key factors undermining manufacturers’ pricing power in May. Average cost burdens faced by Japanese manufacturers fell for the sixth month running in May. Despite remaining steep, the rate of decline eased to its weakest for four months. Lower raw material prices were reported to have depressed costs during the month, with steel frequently mentioned by panellists. Levels of business outstanding fell again in May, extending the current period of decline to sixteen consecutive months. Despite slowing to its weakest since last August, the rate of backlog clearance was still steep in the May survey period. Evidence provided by the survey panel linked the latest decline in work-in-hand to spare capacity resulting from falling workloads.

The PMI report also showed that Japanese manufacturers reduced their workforces for the tenth straight month in May. The rate of job shedding remained sharp, despite easing to its weakest for six months. Of those firms that reported a decline in employment, the majority attributed this to the non-renewal of temporary contracts and lower output requirements.


The CLSA China Purchasing Managers Index rose to 51.2 in May from 50.1 in April, making May the second consecutive month the CLSA PMI was above 50.0, after eight months of being below the critical line. The rate of destocking increased in May, which was encouraging given there is some anecdotal evidence that production may be running ahead of orders. On aggregate the reverse seems to be true. The CLSA China PMI is compiled by U.K.-based research firm Markit Economics. The export order index increased to 50.1, the first expansion in 11 months. The output index fell to 56.9 from 57.4 and the new order index dropped to 56.2 from 56.6.

In fact in China there are two indexes, a fact which has lead to some controversy. The second index produced by the government-backed Federation of Logistics & Purchasing has repeatedly shown slightly higher readings, a feature which may be the result of giving a slightly larger weighting to the state enterprises, which are more oriented towards the domestic market. The May PMI saw the CFLP benchmark reading fall to 53.1 in May from 53.5 in April. This was the third consecutive month this index has held above 50.

So despite a good deal of controversy about what exactly is happening in China, and how sustainable what is happening actually is, it does seem that, for whatever reason, manufacturing industry is expanding at this point.


Conditions in India's manufacturing sector improved again in May, building on growth already seen in April. Most notably, the domestic market was the main driver of expansion, as foreign demand for Indian manufactures remained weak. A second straight month of output and new order growth led companies to hold off from further workforce rationalization. However, competitive pressures continued to restrain the pricing power of manufacturers. Despite accelerated input price inflation, firms cut their factory gate prices for the seventh month running.

The headline Markit Purchasing Managers’ PMI rose for the fifth successive month in May (and for the second month of expansion) to 55.7. This was the highest reading since last September and indicated a marked improvement in the health of India’s manufacturing industry.

With incoming new work and production rising since April, as well as an accumulation of backlogs, Indian manufacturers generally maintained their staffing numbers. Marginal growth in May ended a five-month period of retrenchment.

Purchasing costs in India’s manufacturing sector rose for the second consecutive month, and at an accelerated pace in May. This was commonly linked to higher demand for raw materials. However, strong competition prevented firms from passing on their greater cost burdens to customers. Charges were reduced further, albeit at the weakest rate in the current seven-month period of decline. Commenting on the latest survey findings, Gemma Wallace, economist at Markit, said: “Rising for a second straight month in May, the headline PMI indicates that India’s manufacturing economy is gaining strength, after a five-month period of weakness. Data show that the sector is currently being carried by robust domestic demand, as export sales continued to fall. Nevertheless, this alone was enough to boost manufacturers’ confidence; inventories were built up for the second month running, whilst workers were hired for the first time since last October. There is also evidence of mounting inflationary pressures within the sector. Demand for raw materials contributed to an increase in input costs over the month, although inflation also reflected speculation on commodities markets. While intense competition remained a bind on manufacturers’ pricing power in May, the latest cut in charges was only fractional. If competitive pressures are mitigated by further improvements in demand going forward, it will most likely result in output prices rising.”


United States

Economic activity in the United States manufacturing sector failed to grow in May for the 16th consecutive month, while the overall economy grew for the first time following seven months of decline, say the nation's supply executives in the Institute for Supply Management's latest Manufacturing ISM Report On Business. According to Norbert Ore, chair of the Institute for Supply Management Manufacturing Business Survey Committee:

"While employment and inventories continue to decline at a rapid rate and the sector continued to contract during the month, there are signs of improvement.....May is the first month of growth in the New Orders Index since November 2007, with nine of 18 industries reporting growth. New orders are considered a leading indicator, and the index has risen rapidly after bottoming at 23.1 percent in December 2008. Also, the Customers' Inventories Index remained below 50 percent for the second consecutive month, offering encouragement that supply chains are starting to free themselves of excess inventories as nine industries report their customers' inventories as 'too low'. The prices that manufacturers pay for raw materials and services continued to decline, but at a slower rate than in April."


Latest survey findings indicated that Brazil’s manufacturing economy shrank yet again in May, with indices tracking trends in new orders, production, employment, backlogs and inventories still stuck in negative territory. However, data also showed that contractions in all of these variables, except finished goods stocks, slowed considerably. The monthly drop in output was especially small. The seasonally adjusted Banco Santander PMI) climbed further in May to its highest level in the current eight-month period of contraction. At 47.8, up from 44.8 in the previous month, the index suggested a much more moderate deterioration in operating conditions. Again, data indicated that the improvement predominantly stemmed from the domestic market, as new export sales continued to fall steeply.

Data for input costs, output prices and suppliers’ delivery times pointed toward a further steep drop in price pressures across Brazil’s manufacturing economy in May. Falling demand for raw materials left vendors with spare capacity. Consequently, lead times for input deliveries shortened for the seventh month running (although the improvement was restrained by poor domestic infrastructure).

Competition among suppliers to secure new contracts provided manufacturers with greater scope for price negotiations. Alongside cheaper imports, resulting from a weakened U.S. dollar, pressure on vendors to reduce their prices contributed to another sharp decrease in average purchasing costs. Moreover, the rate of decline accelerated slightly to a new series record. Lower cost burdens were reflected in Brazilian manufacturers’ charges. Firms decreased their tariffs in order to attract more custom.

Coverage Of The JP Morgan Report

The Global Report on Manufacturing is compiled by Markit Economics based on the results of surveys covering over 7,500 purchasing executives in 26 countries. Together these countries account for an estimated 83% of global manufacturing output. Questions are asked about real events and are not opinion based. Data are presented in the form of diffusion indices, where an index reading above 50.0 indicates an increase in the variable since the previous month and below 50.0 a decrease.

The following countries are included in the report:

United States, Eurozone, Japan, Germany, China, United Kingdom, France, Italy, Spain, Brazil, India, Australia, Netherlands, Russia, Switzerland, Turkey, Austria, Poland, Denmark, South Africa, Greece, Israel, Ireland, Singapore, Czech Republic, New Zealand, Hungary