MacroScope

Optimism in Germany is roaring and consumers across the euro zone are starting to become less gloomy. But the latest hard economic data are a reminder of the difference between confidence that things are going to get better, and the hope that they will.

For the moment, we only have the latter.

Friday’s German Ifo business climate survey topped even the highest expectations, as did the ZEW economic sentiment indicator on Tuesday. Euro zone consumer confidence improved this month too, and the mood in financial markets has been largely buoyant since the start of the year.

The hope is that will translate into a growing euro zone economy, but that isn’t happening yet.

“The optimism is out of step with what current real evidence and logic tend to suggest,” argues David Brown of New View Economics.

“German economic confidence surveys seem to be showing more signs of economic spring, but the economy is still struggling with a massive millstone round its neck. The rest of the beleaguered euro zone economy.”

The euro zone economy may be doing far worse than most economists want to believe. That’s not good news for a central bank trying to rescue the single currency through a hotly-contested bond purchasing programme that has yet to get started.

The latest flash purchasing managers’ indexes, which cover thousands of euro zone companies, suggest the third quarter will mark the euro zone’s worst economic performance since the dark days of early 2009, according to Markit, which compiles them.

They predict the economy likely shrank by 0.6 percent in the quarter that finishes at the end of this month.

High inflation is a drag on economic growth in the world’s second most populous country and matters immensely to over 400 million people, or over a third of India’s total population, who struggle to earn enough to feed their families three meals a day.

The particularly volatile nature of inflation in India has confounded policymakers and small business owners and has left economists, who are often running complex statistical models based on a dearth of reliable data, with a poor forecasting record.

To be fair, predicting economic data can be pretty tough in a country where collecting and reporting national statistics is still in its infancy stage. Provisional numbers are often completely revised away.

““The recovery has finished, we are now contracting. The forward looking indicators suggest that things will deteriorate further in the coming months,” – Chris Williamson, chief economist at PMI compiler Markit.

Thursday’s PMI surveys make very worrying reading. Not a single economist out of the 37 polled by Reuters predicted the euro zone services number would fall below the 50 level that divides growth from contraction. In the event, it fell from 51.5 last month to 49.1 in September – its lowest reading since July 2009.

Economists like the PMI surveys because they have a very good track record of predicting moves in the economy. Before the Great Recession hit in 2008, they were among the first indicators that hinted at a downturn to come.

“Horrendous”

“Stink”

“Meltdown”

These are just a few of the (printable) words analysts have used to describe the August release of the Philadelphia Fed’s factory activity index.

And well they might — the Philly Fed has proven to be a nightmare indicator for economists. At -30.7 in August, the index came in far below the consensus forecast for a rise to +3.7 from July’s +3.2. Even the lowest forecast was only -10.

That’s probably one of the worst misses the Reuters polling team can recall in recent memory.