Euro Zone: Ongoing contraction

EcoFlash

Activity was still contracting at rapid pace in November, according to PMI flash estimates released this morning. The Composite PMI for activity came in at 45.8, almost unchanged with respect to the previous month, but well below the neutral threshold of 50. After showing a slower-than-expected fall in Q3, GDP contraction will probably reaccelerate in Q4 2012

Activity was still contracting in November, according to PMI flash estimates released this morning. The Composite PMI for activity, a good leading indicator of GDP growth, came in at 45.8, almost unchanged with respect to the previous month. With the only exception of January, the index has been constantly below the 50- mark throughout the year. What sounds as an alarming bell is that the pace of contraction has increased over recent months.
Germany and France did a little bit better in November than in October. Nevertheless, these two economies are not immune from contraction and they seem unable, at least for now, to support activity in peripheral countries. Markit economics, the compiler of the survey, reported that elsewhere in the region the average rate of decline reaccelerated, hitting its fastest rate of contraction since July.
By sector, contraction sharply accelerated in the most domestically oriented services sector, namely in Germany. Businesses remain particularly sceptical regarding the near-term economic prospects. The business expectations index dropped to its lowest level since March 2009. The pace of contraction eased somewhat in the manufacturing sector. Nevertheless, this sector is not in a good shape either. Orders continued to fall (although at a slower pace than in October), and manufacturers are scaling down their inventories. Both elements suggest that activity is likely to remain subdued going forwards. Under these conditions firms are not hiring. Employment indices sharply fell in both sectors. Job losses and uncertainty will continue to weigh on domestic demand.
All in all, after showing a slower-than-expected fall in Q3, GDP contraction will probably reaccelerate in Q4 2012. For the time being, the beneficial effects which have followed the announcement of the OMT in September (lower tensions and yield moderation) have not yet shown in the real economy. Something more has to be done to reduce the market fragmentation which is heavily affecting peripheral countries. Hopefully, the activation of the OMT might produce a positive shock on confidence and interest rates, brightening economic prospects.

Published On Thu, Nov 22 2012, 12:36 GMT Previous entries

Clemente De Lucia

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Expert in Euro Zone, Italy and Euro Zone Labour Market.

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