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Economy in Brief

MFG PMIs Set Back a Stunned Europe
by Robert Brusca  April 2, 2013

Finalized manufacturing PMIs for the European monetary union fell in March by 1.18 points. Of the nine countries that provide independent topical readings for the manufacturing sectors, eight of nine show declines in March compared to February. In February only four of them had decreased. In January only three of them had decreased. March marks a worsening of the deterioration across the monetary union. This, of course, coincides with some big picture events that are occurring in the economy including the not-quite-yet resolved situation in Cyprus and the very important and still not resolved election results in Italy.

Cyprus has not quite agreed to a deal yet with the troika. And regardless of that deal the path that was taken to get to it is something that certainly should send chills down the spines of many European monetary union members. Italy is a country where the voters seem to have rejected austerity. Italy seems to know what it doesn't want it doesn't seem to be able to establish what it does want. Its major warring political parties have not been able to cut a deal to form a government. Given the peoples' bias against austerity it's not clear at all how Italy fits into a monetary union where austerity is the keystone. Austerity is the policy that plays the crucial role in determining whether or not a nation's banking sector gets help from the European Central Bank. The slippage in the Eurozone only steps up pressure on the European Central Bank and on the European Commission as well as on the troubled European economies themselves. In this environment, the resolution to crisis is made unclear by the goings on in Cyprus and obscured further by developments in Italy...

As for the monthly readings on manufacturing across the monetary union, the overall EMU figure sits below the 18th percentile of its historic queue, telling us that it is weaker than this only about 18% of the time (by implication stronger about 80% of the time). Germany and Denmark have the relative strongest readings in the Eurozone with their queue percentiles sitting in the 30th percentile of their ranges. In the case of Germany the index is weaker about 30% of the time. In the case of Denmark the index is weaker about 36% of the time. Of the remaining seven countries, two have percentile standings somewhere in their 20th percentile range and the remaining five have readings that reside in their teens. The Zone's manufacturing sector is weak everywhere and strong nowhere - near-normal in just a very few places.

We present some tabular data that reference the levels of these PMI readings in the far right-hand column and present be percentile standings in the second to the right-hand column. Moving to the left from those two columns we present data showing where the current indices by region or country reside relative to their individual cycle low-points and pre-cycle-peaks. In four of the nine countries the current readings have fallen more from their respective peak than they have risen from their respective lows. As an example, Greece, in particular, is only 4.4 percentage points up from its cycle low reading and is still 13.2% from its past cycle peak. Comparing these two columns gives you some means of determining how badly individual countries were hit in the financial crisis as well as how much they have recovered from their worst levels. There is a great deal of variability throughout the zone on both of these measures.

The table also provides us with metrics on how these PMI gauges have changed over periods of three-months, six-months, and twelve-months. Over three months seven of nine reporting EMU members have seen their manufacturing indices drop. However, the EMU gauge on the whole increased by 0.65 points over three-month largely because of the weight for Germany. The German index rose by a full three index points. Over six months five of the nine reporting countries reported declines. Yet, over six months, the overall index for EMU increased by 0.61 points - again it is the large-country effect at work. Over 12 months six of nine reporting EMU members showed net declines in the manufacturing indices and the EMU wide index also declined.

Among EMU members only Germany increased on all of these horizons, while Italy, Spain, Ireland and the Netherlands each show declines over all three of these horizons.

Looking at other EU/non-EMU members the UK shows declines on all three time horizons while Sweden shows increases across all three time horizons.

In simple terms of momentum the monetary union divides itself up into fairly clear areas. We can see that the German economy is strong despite its slippage in March, in momentum terms, not many countries come close to matching it. In terms of the level of the German PMI (which is at a point of 49.0 in March), it is exceeded only by Denmark's 52.0 reading. Ireland's 48.59 reading is close to Germany's, as is Austria's 48.12 and even the Netherlands at 48.01. In terms of considering the position of the various nations in the monetary union we need to weigh both the state of the manufacturing sectors (which we can approximate by the level of the manufacturing PMI index itself) and the momentum of that sector (which we can approximate by the change in the index). Such a view creates a much more complicated picture of Europe's standing. If we correlate the ranking of countries by MFG Index value and compare it to a correlation by Year-over-year MFG change, the R-squared relationship is 0.04 - in other words, very low.

The Netherlands has a relatively high PMI standing. Yet, its manufacturing sector has slipped in two of the last three months and is lower on balance over three-months, six-months and twelve-months. Ireland, also with a relatively high manufacturing PMI, has declined in two of the last three months and has also declined over three-months, over six-months and over 12 months.

It's not as simple as saying that the core countries are stronger and that peripheral countries are weaker - or even that that weakness is migrating from the periphery to the core as once seemed to be the case (although some of that is still in train). Indeed, some of the peripheral countries have been so weak, that while they remain rather weak, they have risen from some abysmally low levels. And among countries that we would consider to be more traditionally in the core or closer to it, we find the Netherlands with a great deal of downward momentum and France sputtering.

While not a single-currency-member per se, the UK is another oxymoron country with a relatively firm PMI level, about 48, yet with declines over three months, over six months and over 12 months. Sweden on these metrics looks as strong as Germany but with a higher PMI reading at 53.7 and with net increases over three-months, six-months and twelve-months. Those increases are of increasing magnitudes at that. If we look at the columns that show us the changes from the peaks and from the lows, we find it is Sweden that has had one of the sharpest increases from its low: a gain of 25.1%, second only to Denmark's gain. Yet, oddly, Sweden currently resides at a whopping 14.1% off of its cycle peak, a percentage that is exceeded by only two other countries in the European monetary union: Denmark and Italy.

Because Germany's path is so different from the rest of the monetary union and because it exerts such a heavy pull on overall monetary union data, it's hard to tell the story of Europe by simply looking at the behavior of the purchasing managers index for the union as a whole. Another way to express this difficulty would be to say, that given such pronounced regional differences in the states and the momentum of the manufacturing sectors, it would be impossible to establish a single monetary policy that would be appropriate across all these countries.

Yet, that is exactly what the European Central Bank has to do. Thus, to give its policy some local flavor, the ECB adopted its LTRO loan program. However, to assuage criticisms from Germany, the threshold that borrower-banks must go over to qualify for LTRO participation is that the national policy must embrace austerity. Given the beleaguered state of Europe, that hardly seems appropriate or fair. But that is the current situation of the e-Zone, that is the state of politics in the union and that goes a long way to explaining why there is so much tension and conflict in the Zone.

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