French and Italian Orders Scream WEAKNESS!!

WEAKNESS!! French and Italian industrial orders fell sharply in May joining the chorus of Euro signals that are screaming ‘weakness!’ For each country both domestic and foreign orders fell sharply. Each country had posted an increase in domestic orders in April. Yet in May Yr/Yr orders are off and France’s orders are off very sharply. Both have foreign orders off sharply Yr/Yr.

Square one? One thing that seems clear is that the setback to growth is just beginning. Yet, ECB President Trichet says that EMU could hit its low in Q2 or Q3 then begin a moderate recovery. This is a very upbeat view of the economic circumstances given that it is July and the data for May and June are just beginning to show significant setbacks while more topical outlook surveys have been faltering for some time.

Boom/Bust - The average of French and Italian foreign orders growth is the weakest since May of 2003. The falloff is from a 20% Yr/Yr increase in June of 2007 to a Yr/Yr decline in foreign orders of 6.1%, just 11 months later. This is a clear boom/bust scenario for foreign orders in these two key EMU nations. The risk in such a sharp turnaround is that problems can develop and spread since firms usually cannot predict and be prepared for such a sharp change in trend. Both Italy and France are affected by a sharp deceleration in order growth.

Undue optimism? On balance, the risk to e-Zone growth seems highly likely to extend past Q2 and probably past Q3 as well. Italy and France are likely very representative of the condition other EMU nations. Trichet seems to be promoting a ‘best case’ scenario of sorts even as growth in the world economy is just coming into the grip of a decelerating phase. Monetary policies have not shifted to accommodation so the expectation of a bottom seems premature and without foundation especially for the e-zone where the last policy act was a rate HIKE and where the currency is still moving higher.

Monetary stimulus: lacking or ineffective - Only in the US where the Fed cut official rates has there been an attempt at stimulative central bank action of any degree. But the Fed’s policy shift has been ‘undone’ by private sector credit policy decisions that have result in higher market rates as official rates were cut. The attempt at stimulus seems to have been blunted. In its recent outlook the IMF hiked various world regional growth estimates based on water under the bridge (experienced Q1;Q2 growth), but registered increased- not diminished – concerns for the period ahead – especially for the individual quarters of the second half.

Fiscal stimulus, ditto - On balance, it is hard to see what creates the quick turnaround that Trichet foresees and the IMF does not. Only in the US has there been a stimulative fiscal policy response, although the UK seems to be considering rule changes that might give it some flexibility to act on that front as well. For the most part the slide to weaker growth seems to be in its infancy not in a mature stage that is about to run its course. To the grief of China the weakness could come in its most intense form just as the Olympics are getting not gear.

Decoupling view decouples from reality - All views of de-coupling from the US down-cycle have been cast aside. Wall Street strategists that recommended a de-coupling investment strategy have rescinded their support of it. That should be enough to underline how much the private sector disagrees with the view held by Mr Trichet. Not only will Europe not evade the encroaching slowdown or snap out of it quickly, but there is increasing concern about the impact of the slowdown on the fast growing ‘developing world’.