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Economy in Brief

EMU GDP Falls But French And German GDP Rise
by Robert Brusca August 13, 2009

European growth figures continue to be weak when we log the indicators month by month but if instead we complete a formal GDP presentation, Germany and France have exited recession while the EMU GDP drop is only -0.1% in Q2 of 2009, a drop at an annual rate of -0.4%. EMU’s GDP decline in Q2 is less than the drop in the US but Europe’s Yr/Yr decline has been worse at -4.7% compared to the US year-over-year loss of -3.9%.

In the US the Fed is less downbeat - At its meeting yesterday the Fed implied that the recession in the US was ending but did not take the step of saying in any clear voice that recovery was beginning. It issued in a vague voice the statement saying that activity was leveling off. In Q2 some of Europe, at least, is doing better than that.

GDP as the standard - The contrast between what GDP sees and what monthly indicators show is an important one to keep in mind. GDP accounting has its peculiar elements. Fewer imports boost GDP even though there is no direct impact on domestic output (there is less bought from abroad and so fewer payments made to foreigners- all things equal fewer imports mean higher sales by domestic agents for the same GDP). And inventories cut at slower pace, add to GDP growth even though they are still being cut.

Indicators can lag - Jobs tend to trail activity shifts so the economy will be in recovery before job growth is even positive. In the case of Europe its purchaser induces and the EU Economic indicators from the EU Commission are woefully weak and seem inconsistent with the notion that the recession is ending even if just in Germany and France. But that is the way recessions sometimes end.

Indicators really do lag in this cycle - To put it differently early recovery periods often do not look very different from end recession periods. That is not surprising because they are chronological neighbors. What makes recovery so different is where it is headed compared to the recession period. Even so, the indicators of economic performance in Europe are uncharacteristically weak for the recession to be ending. Even those in Germany and in France are lacking. The GDP rebounds hardly seems like they can be from the same countries as the ones that have produced the indicators they have up to mid-year.

What indicators have been telling us- To begin with we have no detail on GDP in Europe just the few things that might be said at press conferences where the data are released. Industrial data in EMU as well as in Germany and France, in particular, continue to be very weak. The German and French economic sentiment readings which are a weighted average of the EU Commission’s underlying sector indices rank in the bottom 20th percentile of their respective rage of values. The German and French readings are up about 10% or so from their weakest readings in the recession on this score. The EU Commission indices are from underlying diffusion data. All continue to show deep contractions across are all sectors. Germany and France show GDP that is rising, nonetheless. Apparently the change in the EMU index is more important that the level of the index even though it is a diffusion index that has to turn positive to signal sector growth and all sectors industrial, retail, services, construction and consumer are weak.

German’s IFO - Germany has its own IFO survey with a diffusion component and for July its services reading just barely turned positive.

More indicators - The NTC/Markit readings are ISM type readings where a level above 50 denotes expansion. For EMU in June the NTC reading stood at 42.4 for MFG and 44.5 for Services. Both of these indices register declines as they are below 50. For Germany, an economy that is showing positive GDP growth in Q2, its NTC/Market diffusion index stood at 40.8 and was ins the bottom 40 percentile of its range of readings. France at 45.9 also signaled a declining MFG sector but its index was closer to neutral standing in the 49th percentile of its range, despite its low raw diffusion level. The service sectors in France and Germany were weak in June as well, with raw diffusion readings 45 and 47 respectively. Those readings ranked in the lower third of each country’s respective historic experience.

GDP does not seem to have widespread support - In short the industrial data and service sector data we have do not confirm the message from GDP in EMU. We could go through a litany of consumer confidence data as well, as they are weak too. If Europe is recovering (France and Germany, any way) it must be the government spending that is boosting the economy coupled with lower imports and inventories that are being cut by less than before –all these are what I would terms passive augmentations of GDP. The active augmentation from more consumer spending and more business investment has not begun. Inventories are likely adding to GDP growth but not by actively being built.

Exports and government are probably the main drivers - We have seen episodic country reports that have revealed exports have begun to rise. So the economies that are in recovery may now be firing on two cylinders exports and the government sector. It’s not a very wide base for growth yet. But it is also the support within EMU that is helping to cut the drop in the formal measure of GDP. Progress is being made but it does look like the sort of progress that usually marks the ends of recessions. Too many European, German and French sectors are just too weak.

E-Area and main G-10 country GDP Results
  Quarter over quarter-Saar Year/Year
GDP Q2-09 Q1-09 Q4-08 Q2-09 Q1-09 Q4-08 Q3-08
  EMU-15 -0.4% -9.7% -6.9% -4.7% -4.9% -1.7% 0.5%
  Austria #N/A -3.3% -3.9% #N/A -3.4% 0.2% 2.0%
  France 1.4% -5.3% -5.5% -2.6% -3.4% -1.6% 0.1%
  Germany 1.3% -13.4% -9.4% -5.9% -6.7% -1.8% 0.8%
  Greece 1.3% -4.7% 1.2% -0.2% 0.3% 2.4% 2.7%
  Italy -1.9% -10.3% -8.3% -6.0% -6.0% -3.0% -1.3%
  The Netherlands -3.4% -10.3% -4.1% -4.9% -4.2% -0.8% 1.7%
  Portugal #N/A -6.2% -7.1% #N/A -3.7% -2.0% 0.3%
  Spain #N/A -7.4% -3.8% #N/A -3.0% -0.7% 0.9%
  UK -3.1% -9.2% -7.0% -5.6% -4.9% -1.8% 0.5%
  US -1.0% -6.4% -5.4% -3.9% -3.3% -1.9% 0.0%
  Japan #N/A -14.2% -13.5% #N/A -8.4% -4.4% -0.3%
  Switzerland #N/A -3.2% -2.2% #N/A -1.6% -0.4% 1.2%
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