· The picture on top captures the path of the industrial sector and the services sector in EMU. Both have turned sharply lower by mid 2008 after having peaked about one year ago. The overall EMU sentiment index is now in the 36th percentile of its range nearly at the border of the bottom third of its range, a weak enough position that makes it reasonable to talk of downside risks and even recession potential. The two weakest sectors/areas by their percentile standings are services (15th percentile) and Consumer confidence (24th percentile). The industrial and construction sectors are the relative strongest with standings at about the mid 50s percent of their respective ranges. · In July all sectors fell and most fell sharply. Services with a seven point fall and retailing with a six point fall made the largest drops in the month.
· The largest EMU and EU countries saw their overall sentiment gauges fall in the month with only the smallest of the large countries (Spain) showing month-to-month improvement. In the case of Spain, however, the ‘bounce’ is a bit of a ‘dead cat bounce’ since among these large European economies Spain’s has the lowest percentile standing for its overall sentiment reading which stands at a very lowly 14 percent. At 26 percent the UK is the next lowest and at 27 percent Italy is the third lowest. France is the relative strongest at a percentile reading of 46, followed by Germany at 44 percent. The EMU relative reading at 37.4 percent is just slightly above the EU reading which is 36.0 percent.
· We focus on these percent percentile readings since each industry and country has its own range and dynamic in terms of these net balance readings. By drawing attention to the percentile position of a reading in a range of the EU net balance outcomes we can compare across industries and countries with greater confidence that we are comparing apples with apples or oranges with oranges.
· By comparison, look at the raw net balance readings. In July all the sector net balance readings are negative except services, which is at zero. But at zero services is relatively weaker in its range than are the other sector readings (compare their percentiles!). In perusing the data you might be tempted to see services as the strong sector since it is zero while the others are negative. But the fact is that the services gauge is simply less prone to fall into negative territory and at zero it is signaling greater sector weakness in services than a -20 reading would be signaling for consumer confidence.
· These EC Commission surveys are very comprehensive, covering the various EU/EMU member countries and all the relevant sectors by country. A full perusal of this month’s data reveals a very weak Europe and one that is in the process of weakening sharply as well. At the same time the topical inflation report for Germany suggests that headline inflation is still pushing higher, something that will keep the ECB back on its heels.
· We continue to see the GLOBAL slowdown as a reaction to the rise in commodity prices – especially oil - a gain that has taken a toll on all the major consuming nations. The US slowdown, the global financial tangle and the rise in oil prices are hitting the world economies at the same time. It is no wonder that the global business cycle is back in sync…or should I say sink?