Sentiment Weaker Following Euroarea PMI Contraction, Refutation Of "Technical Recession"

January's hopium catchphrase of the month was that Europe's recession would be "technical" which is simply a euphemism for our Fed's beloved word - "transitory." Based on the just released Euroarea PMI, we can scratch this Euro-accented "transitory" addition to the lexicon, because contrary to expectations that the Euroarea composite PMI would show expansion at 50.5, instead it came out at 49.7 - the manufacturing PMI was 49.0 on Exp of 49.4, while the Services PMI was 49.4, on hopes of expansion at 50.6, which as Reuters notes suggests that firms are still cutting prices to drum up business and reducing workforces to cut costs. This was accompanied by a overnight contraction in China, where the flash manufacturing PMI rose modestly from 48.8, but was again in contraction at 49.7. We would not be surprised if this is merely the sacrifice the weakest lamb in the pack in an attempt to get crude prices lower. So far this has failed to dent WTI much if at all following rapidly escalating Iran tensions. What is curious is that Germany and France continue to do far better than the rest of the Eurozone - just as America has decoupled from Europe, so apparently have Germany and France. This too is surely "sustainable."

Some more on Europe's "surprising" contraction from the WSJ:

Markit Economics said Wednesday its composite purchasing managers' index for the 17-nation currency bloc fell to 49.7 in February after a rebound to 50.4 in January, and way below forecasts in a Dow Jones Newswires poll of economists for 50.8. A reading below 50 means activity is contracting.

 

"The euro zone is far from out of the economic woods and faces a hard slog to get back to sustained growth," said Howard Archer, economist at IHS Global Insight, a forecasting group.

 

"Indeed, the surveys reinforce our belief that it is more likely than not that the euro zone will suffer a further contraction in the first quarter of 2012 which will put it back into recession," he said.

 

The contractionary PMI reading was balanced somewhat by a rise in new business taken on by euro-zone factories in December, suggesting manufacturing output could strengthen in the coming six months. Eurostat, the European Union's statistics agency, said factory orders in December grew at the fastest pace since May last year, boosted by strong growth in Germany, Ireland and Italy. Orders were up 1.9% on the month, following a 1.1% fall in November.

 

There have been other signs of late that the economy is stabilizing. Euro-zone consumer confidence improved for the second straight month in February, and German economic expectations also turned positive in February for the first time in nine months.

 

James Ashley, economist at RBC Capital Markets, said that on balance, a recession is likely in the euro zone but it will be "shallow and short lived." In any event, Mr. Ashley said, "growth prospects for the euro area remain lackluster."

And here are analyst kneejerk reactions to the Eurozone PMI data, via Reuters.

BEN MAY, ECONOMIST, CAPITAL ECONOMICS

"February's fall in the euro-zone PMI puts a bit of a dent in hopes that Q4's economic contraction will prove to be a one off."

"On past form it is consistent with a small quarterly fall in GDP. Note that the fall was entirely down to a drop in the services index. Perhaps unsurprisingly, given the recent run of more upbeat economic data from the U.S. and elsewhere, the manufacturing index climbed slightly."

"More generally, though. with concerns about a Greek default likely to rumble on for the foreseeable future and further austerity measures likely to be announced in parts of the region, we still expect Q4's contraction to mark the start of a sustained fall in euro-zone activity."

"For now, then, we are still penciling in a fall in GDP of 1 percent or so this year."

HOWARD ARCHER, ECONOMIST, IHS GLOBAL INSIGHT

"The euro zone is far from out of the economic woods and faces a hard slog to get back to sustained growth."

"The surveys reinforce our belief that it is more likely than not that the Eurozone will suffer further contraction in the first quarter of 2012 which will put it back into recession following the GDP drop of 0.3 percent quarter-on-quarter in the fourth quarter of 2011."

"The region is still facing major headwinds, notably including increased fiscal tightening in many countries, rising unemployment, and still serious concerns and uncertainties over the sovereign debt crisis (despite the recent deal on Greece) which are likely to constrain businesses' investment decisions."

"Relatively muted global growth is limiting export orders."

"The surveys reinforce our belief that the ECB will trim interest rates by a further 25 basis points from 1 percent to 0.75 percent in the second quarter as euro zone economic activity remains soft overall and fragile."

ANNALISA PIAZZA, ECONOMIST, NEWEDGE STRATEGY

"After the moderation registered by the French and German PMI figures out earlier this morning, euro zone PMIs also showed a slight lower-than-expected outcome in February, failing to show further momentum in the economy."

"In details, the manufacturing index rose by 2 tenths to 49 in Feb. Although this is another baby-step in the right direction, it clearly lacks underlying strength."

"Industrial activity in the major euro zone periphery countries is in a contraction mode and it will take a while to see a self-sustaining improvement in the manufacturing index."

"As for the services sector, the overall EMU index fell ... This is again due to some moderation in domestic demand in the main euro zone economies, coupled with depressed domestic demand in countries like Italy and Spain that suffer from tight fiscal conditions and a super-weak labour mkt."

"Although the euro zone economy is set to stabilize in Q1-12, we suspect divergences between core and periphery countries will widen."

PETER DIXON, ECONOMIST, COMMERZBANK

"It doesn't bode well for Q1 but to be fair we always said Q1 wouldn't be very strong so it doesn't really come as any great surprise."

"The economy remains stuck in low gear. It's indicative of a flatlining economy, maybe slightly contracting rather than a major slowdown."

"The numbers we got out of Germany were a little bit disappointing.

VIEW FROM SURVEY COMPILERS

CHRIS WILLIAMSON, CHIEF ECONOMIST, DATA COMPILER MARKIT

"A retreat back below the 50.0 no-change level for the euro zone PMI is a disappointment, and highlights the ongoing risk that the region may be sliding back into recession."

"Although business conditions are showing signs of stabilising so far this year, which represents a marked improvement on the widespread deepening gloom seen late last year, the euro zone is by no means out of the woods. Demand needs to improve considerably in coming months before we can safely say that the region will return to anything like reasonable growth."

"Encouragingly, business confidence continues to improve on the better news flow surrounding the sovereign debt crisis and renewed stimulus from the ECB. But even German companies remain unsure about the outlook, and many are clearly seeking to cut costs where possible in order to be more competitive in a tough business environment."

"Sharp divergences in performance also continued to be evident across the region, with modest growth in Germany contrasting with a steep decline in the periphery. Given the lack of domestic demand in austerity-hit peripheral countries, this divergence looks set to continue for some time."