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Economy in Brief

EMU PMI Services Index Rebounds As Politics And Financial Decay
by Robert Brusca  January 4, 2012

It is hard to say with a straight face to anyone involved in markets that things in Europe are looking better. But the EMU PMIs for MFG and now for services each have taken a turn for the better in December. Yet Euro bourses, fixed income markets and foreign exchange relationships do not show even a glimmer of good news. Germany did get off a 10-Yr bund auction that surpassed its disaster auction of December, yet the cover metric for it was still below par. The currency itself continues to slip. Stocks are lower as European bank concerns can be expressed by the sharp drop in the share price of Italy’s Unicredit.

The chart of the services PMIs puts these indicators in the context of recent Euro recessions using the recession band shading from France. The results are not very reassuring.

The chart shows that PMI levels are now at the same position and lows (except for Germany) reached in the 2001 recession. On balance the services indices have fallen a bit more from their recent cycle peaks than they would have to drop from their current level to reach their past cycle lows. Does that much increased weakness really lie ahead? Probably not, but there is a lot in the mix to determine that result.

There is no formula for recession. Europe is now in a position that is consistent with being in a recession (a mild one) but it is still far from the kind of weakness that would compared the recession to the lows of the recent 2007-2009 cycle. Germany is the exception as it has not reached the kind of weakness it experienced even in the mild 2001 cycle let alone the 2007-2009 cycle.

The recent rebound in the MFG and the Services PMI’s still may not be telling. And European conditions continue to be severely challenged. Greece is slipping and with economic weakness throughout the zone all the austerity plans are going to fall short across the Zone. What happens next depends in part on how nations react to underperforming their austerity goals.

The rebound in the PMIs is not necessarily a sign that this is as bad as things will get. France and Italy, for example, had a nice false rebound signal at the start of the 1991 downturn before crashing and burning at much lower cycle lows (see chart).

The banking sector morass in the Zone remains a huge concern and is intertwined with its sovereign debt problems. With the new line of credit from the ECB Euro-banks have taken to borrowing funds to invest in the sovereign bonds of the country in which the banks are domiciled, in effect doubling up on their exposure while giving the pretense of market approval to the sovereign whose debt they buy. Meanwhile national authorities continue to support banks and their too risky load of assets and too thin crust of capital.

This reciprocity of the weak being supported by the weak does not seem to be a real keystone of success. For the moment we have to simply admit there is a disconnect between the improving EMU economic data and the still weak and largely deteriorating financial conditions in the Zone, a Zone that is trying to Band-Aid its way to success. Meanwhile the politics that backstops the whole mess is as fractious as ever. Welcome back: it’s 2011 again or is it really 2012? Really hard to tell just looking at the data and while a calendar could be decisive its telling might still be hard to believe. Can so much time really pass with so little being done when the need for action is so great? Welcome to Europe, the land that time forgot.

EMU Services Sector
  Dec-11 Nov-11 Oct-11 3Mo 6Mo 12Mo %ile
Euro-Area 48.80 47.53 46.40 47.58 49.11 52.58 44.7%
Germany 52.36 50.25 50.63 51.08 51.15 54.62 56.2%
France 50.35 49.61 44.63 48.20 51.18 55.55 44.7%
Italy 44.52 45.81 43.87 44.73 46.16 48.58 27.8%
Spain 42.10 36.83 41.76 40.23 42.86 46.46 43.1%
Percentile is over range since May 2000
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