PMIs...Substantial Weakness Emerges

Among the eight jurisdictions listed in the table, five of them show that composite index readings eroded in October. The EMU reading fell to a dead neutral (or flat) reading of 50.0. The EMU composite has fallen off for three months in a row as have readings in France and Spain. The services sectors in the EMU, Germany, France, and Spain now have slipped for three months in a row as well. Among European reporting entities, only Germany has a composite index above its historic median calculated since January 2016 (above 50%). However, on that timeline, China and the United States both are flying high and firing on all cylinders in October.

Manufacturing is generally still expanding. It eroded month-to-month in October only in the United Kingdom, but even there the sector continued to expand. Apart from China and the U.K., manufacturing has improved and showed output increases for two months in a row everywhere else.

Manufacturing remains the backbone of the expansion; however, as a sector, it is not the dominate employer so seeing erosion in the services sector is a real issue of concern. Countries have already engaged in a good deal of help and stimulus for troubled businesses and people. It may be politically difficult for some to pony up the same sort of help again if there is further economic backsliding. For now antivirus actions largely consist of compartmentalizing trouble spots or ‘at risk industries’ rather than invoking nationwide freezes in activity. That means that the kind of shutdown experienced in April is not being repeated broadly in Europe. However, France is an exception and is in full lockdown mode with 65mln people confined to their home and needing authorization to be out and about. France plans the shutdown to last one month. But for now compliance appears to be ‘poor.’ And it is still not out of the question that the full-lockdown approach could spread. Italy is seeing a record pace of infections as well. The U.K. is engaging in compartmentalization while Germany has a lighter federal policy that shutters bars, cafes, restaurants, theatres, operas and cinemas.

For now when it comes to growth, the EMU-wide region is on the fence, signaling no growth – but not contraction either. France, however, signals contraction as the services sector’s weakness is overpowering the expansion in manufacturing. The same is true in Italy and Spain. Those are three of the four largest economies in the EMU.

China and the U.S. show strong composite readings underlined by strong and strengthening service sector readings and ongoing improvements in manufacturing.

The U.K., still embroiled in unresolved Brexit negotiations with the EMU, shows a sharp drop in its composite reading in October as well as slippage for two months in a row. The slippage is caused by weakness in both manufacturing and services (both for two months running); the slippage in the U.K. services sector is large and will worsen as virus-blunting policies remain in effect.

Driving the eroding trends is the ongoing battle with the virus. Apart from the virus, the European economies seem healthy. But Europe has just put a number of new restrictions in place as countries grapple to stop the spread. The ‘spread’ in Europe is so severe and widespread that it has even motivated Sweden to implement new restrictive guidance including the ‘rule of eight’ meaning that no more than eight people should be seated around a single table. Given the way the virus is performing and behaving, it seems highly likely that even if the current anti-virus steps being taken are successful there will be negative knock on effects for economic variables in November as well.

Policy continues to be run based on what the virus demands. Meanwhile, there seems to be some ongoing progress with vaccines, but that remains a slow slog and there still is little hope getting any vaccine distributed and functioning on a broad basis anytime soon. With this second wave of infection having emerged in such a full-blown state and on such a widespread basis in both Europe and the U.S., there is reason to wonder if this will be the last such wave. Or will Europe and the U.S. remain at risk to further waves of infection until/unless a vaccine is developed? There are questions here that no one can answer.

Uncertainty rules the roost
For the moment the financial markets are brushing aside the uncertainly of all stripes. Markets are not overly worried about the virus and in the U.S. markets are shrugging off the election uncertainty as well –probably because it looks like even if there is a change in the Oval Office Republicans will hold onto the Senate and the House appears as if it will remain with a solid but lesser Democrat majority. All that means that policymaking in the U.S. is not likely to see dramatic changes in the year ahead because anything that gets done will have to please two different masters: one in the House and one in the Senate regardless of who is in the White House.

Commentaries are the opinions of the author and do not reflect the views of Haver Analytics.