Confirmation Of European Recession Following "Miserable" Composite PMIs Means French Downgrade Coming
While the market continues to look forward to the latest Eurosummit on Wednesday (which rumor is may be postponed once again) with mouth-gaping expectations, the truth is that Europe "may have already entered a recession" as Goldman predicted some weeks ago, a prediction which was confirmed by today's miserable manufacturing and services PMI numbers. From Goldman: "The Euro-zone flash composite PMI came in at 47.2 in October, down from 49.1 in September. The October reading is below consensus expectations, which pointed to a somewhat more modest drop to 48.8. The decline was registered in both manufacturing and services, though it was slightly more pronounced in the latter (Manufacturing: down from 48.5 to 47.3, Services: down from 48.8 to 47.2). The pace of the decline in the headline output component of the Composite PMI accelerated in October. With its sixth consecutive monthly decline, the composite PMI has reached its lowest reading since July 2009. Looking at the components, the forward-looking indicators suggest further contraction in the coming months, with new orders remaining the weakest component at 45.4. One positive element in today’s report is that the pace of the decline in orders is decreasing, though it is clearly too early for any firm judgment whether this points to some stabilisation soon. Alongside fewer new orders reported in companies’ pipelines, surveyed firms anticipate a more muted improvement in the labour market. This is reflected through the employment component, which we view as a good gauge for medium-term outlook, declined further in October to a level of 50.3 - its lowest level since the recovery in the labour market in May 2010." As Reuters concludes: "The euro zone's debt crisis might already have pushed the bloc's economy back into recession, according to business surveys that showed China's economy taking a stride forward in October." So why is this an issue? Simple - as a reminder in a little noticed statement last week, S&P said it "would likely downgrade the credit ratings of France, Spain, Italy, Ireland and Portugal if the euro zone slips into another recession." Well there's you recession confirmation. So: where is the European bailout killing downgrade of France?
More from Goldman:
At a country level, the signals are more mixed and less straight-forward to interpret. We only have country data for France and Germany at this stage: the two flash estimates diverged somewhat in October. French manufacturing surprised on the upside, by increasing from 48.2 to 49.0, but its services counterpart plunged from 51.5 to 46.0, with business activity falling below the 50-threshold for the first time since August 2009. The German figures, by contrast, revealed the opposite development: the Services PMI jumped unexpectedly from 49.7 to 52.1, but manufacturing fell further than consensus had expected, losing more than two points from 50.3 to 48.9. Though we do not have the precise figures, the Markit press release suggested that the Composite PMI in the “rest of the Euro-zone” – excluding France and Germany, including the periphery – fell further in October, to below 45.
Overall, these figures are consistent with our view that the Euro-zone is about to slide into a mild recession in the fourth quarter. Whether it will be indeed only a mild recession will crucially depend on government’s ability to come up with a sufficient answer to stabilise financial markets.
Alas, whether or not it is a mild or profound recession matters little to the rating agencies, which will have no choice but to go ahead and pull the trigger.
And some more on the "miserable" recession confirmation from Reuters:
The flash Markit euro zone composite PMI, which measures business activity at thousands of manufacturers and service sector companies, sank to 47.2 this month from 49.1 -- some way below the 50 mark that divides growth from contraction.
That was below every forecast from 19 economists polled by Reuters, to say nothing of the consensus for 48.8. Survey compiler Markit said it was consistent with a 0.5 percent rate of quarterly decline in gross domestic product.
"All in all this is a miserable report, highlighting the fact that the euro zone is falling into recession again," said Peter Vanden Houte, chief euro zone economist at ING Financial Markets.
"The snail-like progress in the resolution of the European debt crisis is unlikely to alter this picture soon."
Still, world stocks put in solid gains on Monday, following a rally on Wall Street on Friday, on comfort that China's economy may not be in as much danger as feared.
The China Flash PMI showed its vast manufacturing sector snapping a three-month run of contraction, thanks to robust domestic demand. Price pressures also eased, in perhaps the only positive common ground shared with the dire euro zone report.
Economists, who largely failed to see the Great Recession coming in 2008 until it had already started, were unusually frank about the significance of the surveys.
"If the euro zone can't slip into recession when it is facing the biggest financial crisis for generations and business surveys fall to the extent that they have done, when can it?" said Alan Clarke, economist at Scotia Capital.
Jeavon Lolay, head of global research at Lloyds Banking Group, agreed: "It definitely suggests recession from this point."
Alas, that's not what French banks, whose existence depends on FrAAAnce's rating, needed to hear today.