Wednesday, November 6, 2013

Euro-zone Economy Flat At Best!

Eurozone business activity lost momentum at the start of the fourth quarter, as companies on the whole continued to cut jobs. These recent  figures suggest any recovery remains flat at best. Eurostat, the EU's statistics agency, said retail sales in the 17-nation bloc fell 0.6% in September from August. Howard Archer, chief economist at Global Insight, said: "September's relapse in retail sales fuels suspicion that consumers across the Eurozone will likely remain pretty cautious in their spending in the near term." Retail sales fell back sharply in Portugal dropping by 6.2% month-on-month, Spain saw a 2.5% month-on-month fall during September.

ECB headquartersData firm Markit said Wednesday its composite Purchasing Managers' Index, a monthly gauge of activity across manufacturing and services, edged down to 51.9 in October from 52.2 in September. A reading above 50 indicates growth. Wednesday's figure marks a slight upward revision for October, but still represents a slowdown from prior months. While still above the 50-point mark that separates growth from contraction this is not a strong pick up following months upon months of contraction. It seems companies received fewer new orders than in previous months and have continued to cut jobs, employment balance has been below 50 for the 22nd straight month.

The decline in employment was slightly faster than in September. Record levels of unemployment are among the Eurozone's biggest economic problems and threaten to undermine its economic recovery by exacerbating  weak domestic demand. Often these workers have little in the way of savings after years of harsh times, this means that the burden of caring for them will be transferred to society. If to many people shift into this category the region will slowly wear down through attrition. The alternative to working and producing is to use up your savings or be sustained by the government, family, or friends.

A day after this post first appeared the European Central Bank (ECB) cut its benchmark interest rate to a record low of 0.25%, down from 0.5%. This surprised many analyst. ECB president Mario Draghi confirmed the decision to cut rates reflected an outlook of low inflation and economic weakness. Inflation in the Eurozone fell to 0.7% in October, prices in Greece one of those worst hit by the economic crisis have not risen since July and some economists are also worried about deflation in Spain. The ECB's target is to keep inflation just below 2%. Following the rate cut announcement Draghi said the bank expected to see "a prolonged period of low inflation followed by a gradual upward movement towards inflation rates of below but close to 2%", he said the Eurozone was seeing "weaker than expected economic activity".

September is the final month of the third quarter, so this retail data could impact on official quarterly GDP figures. Markit gives detailed figures for five countries, Germany, France, Italy, Spain and Ireland account for the bulk of euro-zone economic output. All showed growth in business activity in October, with the weakest rates in France and Spain. After massive help from the ECB in the way of loans and super low interest rates the euro-zone has emerged from an 18-month recession in the second quarter with growth of 0.3%, but recent data has also pointed to a slowdown in the pace of even this weak growth. A stronger Euro over the past several months has not helped exports thus further dampening hope of a recovery.

Long ago EU leaders agreed to create a banking union as a way of breaking the so-called doom loop. This is the vicious circle in which states go so deeply into debt to support failing banks, that it forces a country to seek a bailout or risk causing it to leave the euro zone. An agreement to create a banking union has been hard to put into practice, in principle a standard process for winding down troubled banks would be a key component of this. Resistance to a massive transfer of wealth from those who hold bonds and other such debt continues as they talk, and talk, and talk. The fact that the Euro was built on a flawed foundation continues to haunt the the EU, expect things to remain flat at best for as long as the eye can see.

  Footnote;  Your comments are welcome and encouraged. If you have time check out the archives for other post that may be of interest to you. My two other articles about Europe can be found below,

1 comment:

  1. For a while, I kept thinking that Draghi was going to pull it off and the Eurozone economy would recover with enough cheap money. But it has only gotten worse. The doom loop is fully in place. Germany cut wages to become an export giant, and now there isn't enough internal demand for all the production. Flat, at best, is as good as it will ever get in Europe. If it weren't for so many centuries of horrific wars, they might just pull the plug.