MacroScope

Is Europe past the worst?

By Mike Peacock
July 24, 2013

The PMI surveys take top billing today. China’s report showed a further slowdown in manufacturing activity with the index following to an 11-month low and well into contractionary territory.

Flash readings for the euro zone, Germany and France are due later. Whisper it, but it could just be that Europe’s economy is past the worst.

Beijing’s travails will obviously have knock-on effects for Europe, particularly Germany for which China is such a huge market. A Chinese “hard landing” – still not the central scenario – would be the last thing the world economy needs just as it shows signs of life.

Having said that, both the German government and Bundesbank have been talking up second quarter growth while admitting it will moderate somewhat in the third.

One of the European economic themes of the year so far has been the fear that France will fall so far behind Germany that the twin motor of EU policy will break, but here too there have been tentative green shoots.
French industry morale hit a year high yesterday and consumer spending has perked up a little. However, June unemployment numbers due later in the day are likely to show the jobless rate at or near a record level.

It’s early days but euro zone consumer morale hit a two-year high this month, British GDP data tomorrow is likely to show the worst has passed there and even Spain’s central bank is forecasting the economy almost stabilized in the second quarter. So there are signs of hope, albeit patchy, given the dire state of some of the euro zone’s highest debtors.

The German and French PMI numbers are forecast to creep up. A raft of European company results this week will give further grist to the mill.

One of Europe’s enduring weaknesses is a paltry level of bank lending, which the European Central Bank has been agonizing over without coming up with a decisive policy. The ECB’s latest bank lending survey this morning is unlikely to show much improvement.

UK industry minister Vince Cable has accused a “capital Taliban” of policymakers and regulators demanding banks hold higher amounts of capital in order to prevent a re-run of the 2007-2009 world financial crisis but at a level which is preventing them from lending.

The United States’ economic trajectory is more firmly upwards – hence the Federal Reserve’s decision to announce an exit plan from QE, which caused such ructions in financial markets. Its preliminary manufacturing PMI reading is due this afternoon and forecast to edge further into expansionary ground.

The U.S. recovery, compared with Europe’s malaise and China’s slowdown, gave Washington the impetus it needed to force the argument that growth measures must take precedence over austerity at a meeting of G20 finance ministers last weekend.

Germany still hankers after an agreement on binding debt reduction targets but the focus is now firmly on fostering recovery. It’s probably Beijing’s ability to rebalance its economy without knocking it over that will be decisive.

 

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