EMU Recovery Remains In Force

The EU indices rose in January improving to -13 from -16 for all of EU. All the large country indices improved on the month from Germany to France to Italy to Spain to the UK. While the EU Service index is the highest raw reading at -2 in January as a percentage of its range the reading only resides in the 46th percentile. Retailing, with a raw reading of -3, stands at a much stronger 71st percentile of its range. At -13 the industrial sector and consumer confidence metric stand in the 56th percentiles of their respective ranges.

To compare sectors look at the percentile ranking or at the ranking by queue in the third column from the right of the table instead of at the raw readings. Theses measures position each component as a percentile of its range or in a queue of past observations. Right now the range percentile readings are much higher than the queue percentiles. The sector readings have rebounded from the lower reaches of their ranges but are still ranked weakly compared to the more common habitat of those gauges when times are normalized. While the overall EU index stands in the 66th percentile of its range, at the edge of the top third of the range, when ranked by queue the reading is only in the bottom one third of that range. That means the over index is only weaker than the current reading one third of the time. That interpretation gives a much better understanding of how weak Europe still is.

The only truly strong queue percentile reading for EU is for retailing; that sector is stronger than its current rating only 29% of the time. All other sector readings are well below the 50% mark. Construction is in the bottom 14% by queue and services are in the bottom 19 percentile. These are still extremely weak readings.

By country Italy has the strongest queue percentile, and, at 51 percent, it is the only one above its midpoint. That means Italy is the closest to being back to normal. Next best is France in the 39th queue percentile. The worst off is Spain in the 15th percentile of its queue and then Germany in the 33rd percentile of its queue.

That is not surprising since Germany and Spain have the lowest statistical correlation to the overall EMU reading among large EMU member countries. Both are lagging in this cycle

On balance the results may not be what you expected to see. It is not the usual locomotive effect of the big two or three pulling away from the pack which rides on their coat-tails but rather Italy that is doing best by the queue measure and Spain being weakest, beset as it is with real estate problems that are usually slow to mend – can’t export your way out of a real estate problem. On a queue basis (probably the best way to look at it) Europe is still well away from a sort of a neutral reading on the EU Commission indices. On a range percentile basis the EU is already back above the mid point for the overall index and for all sectors except services and construction. The recovery, however, is weak as it is leaving Spain behind and Germany is a laggard, not a leader.