Surveys that have been published on Tuesday suggest that there is no more improvement in the data in the USA and in China and that economic activity is still shrinking rapidly in the Euro Area. None of these 3 large countries or regions seems to be able to take in charge the global economic prospect.
The United States used to play this role in the past helping the world economy to converge to a stronger trajectory. It’s no longer the case as the United-States are not able to grow rapidly and strongly for a long period of time. In China rebalancing the growth process in favor of consumption is long and costly. This has changed the Chinese role and impact on the world economy. We see in Tuesday’s publications that data in this two countries are still choppy and do not show in clear direction.
In the Euro Area the recession is still there, that’s the message from the data. The issue is that there is no external relay and as internal demand stays weak there is no possibility for growth. Data in April show that there is no real source of improvement. Specifically in Germany surveys’ results suggest that the end of 2012 acceleration is over and that impetus from outside is now weaker as new export orders are currently decreasing. In France, the PMI/Markit survey is marginally improving but the INSEE business cycle index is at its lowest since August 2009. The economic prospect is still very fragile in the Euro Area.
This situation will not create an incentive to change already accommodative monetary policies. This kind of data will not urge the Federal Reserve to stop its financial assets purchases. In the Euro Area we can expect that Jôrg Asmussen from the ECB will follow the line he gave last week-end. According to this line of conduct the ECB could reduce its interest rates in case of negative shock. The very weak situation in Germany and for the whole Euro Area is of this nature. We expect that the ECB will say that its interest rates will remain low for a very long time period. Nobody can imagine that they will rapidly change their mind on monetary strategy but by saying that they can change and monitor expectations to improve Euro competitiveness.
(Most surveys I refer to have the following reading. When an index is above 50 this means that there is an improvement. The index can represent production, new orders or jobs. When the number is higher from one month to the other this means the representative item is growing more rapidly. When the index is below 50 this means deterioration)
The PMI/Markit index for the manufacturing sector was lower in April. Its level was 52 versus 54.6 in March and 54.9 on average for the first quarter. Activity in the manufacturing sector is growing but at a slower pace than during the first three months of 2013.
This index momentum is consistent with the 3 month change profile of the manufacturing production index. The change in effective production will probably be slower during the second quarter.
There is no downside break but there is no acceleration. This is confirmed by a lower momentum for the new orders index. It is still above 50 but lower than in March and during the first quarter. This is a drag to economic activity as the ratio of new orders to Inventories is one coming from higher numbers (a ratio above one means that new orders are growing more rapidly than inventories, it will be then necessary to increase production. It’s the contrary with an index below 1). On the order side, new export orders are still growing but less rapidly and backlog orders are decreasing marginally. We cannot expect a rapid and strong improvement in the manufacturing production index.
The perception that the American economy was not able to accelerate was already seen in the two Fed’s surveys published last week. The Empire State Survey from the New York Fed and the Philly Fed from the Fed of Philadelphia were both below their 10 year average. The economy is growing but not too rapidly.(be carefull in next friday GDP figures for the 1st quarter a large part of the improvement will come from inventories (after hurricane Sandy)
Last week publication on GDP (7.7% for the first quarter after 7.9 % in Q4 2012) was disappointing and the PMI/Markit/HSBC survey was expected as a guide which would say that recovery is still on the road. That was not the case. The synthetic index was just above 50 at 50.5, economy is up but at a slow pace, below March figure (51.6) and below the first quarter average (51.5). Economic activity is not accelerating in China at the beginning of the second quarter.
New Orders index profile suggests that production will not accelerate in the coming months. The New Orders to Inventories ratio has dropped and is now close to 1. New Export Orders index is now below 50. The improvement seen since last fall seems to be over now.
This has strong consequences as China is the most powerful growth engine of the last ten years. This will have a negative impact in Asia. The recovery seen in the region was a by-product of Chinese improvement since last fall. If there is no acceleration in China the impetus to Asia will be lower.
For the world economy this lack of momentum is also a drag and with that in mind we cannot expect acceleration in global growth.
The improvement seen at the end of last year is over. The index was almost stable compared to March (46.3 in April and 46.4 in March) but marginally lower than Q1 average (46.9). The index here is for the whole economy and then shows that the Euro economy is still shrinking. Details by sectors have the same tempo. In the manufacturing sector the index was at 46.5 in April versus a first quarter average at 47.5. In the service sector the index was at 46.3 versus 46.7 for the first three months of 2013.
One important consequence of this weak momentum is a continuous deterioration of employment outlook. That’s what is shown on the right chart below. There is no acceleration by the index level is still compatible with lower employment. This will be a real issue as usually the social safety net funding is based on employment.
What is really bothering in the short run is the lower momentum in the new orders index. The chart on the left below shows that the New Orders to Inventories ratio is on a downside trend meaning that New Orders flows can be matched by inventories. There is no necessity to produce more. At the same time, new exports orders in Germany and France are slightly lower in April and now well below 50 in Germany. The impulse from outside is weaker than expected a few months ago. During the second quarter industrial production will continue to decrease.
The second quarter starts on a weak tone. The ECB can found here a reason to change its mind on interest rates. We can expect a drop in interest at the next meeting and we expect that Mario Draghi will clearly add that monetary policy will remain accommodative for a long period of time. This could change expectations of investors, companies, consumers and let them perceive that the framework is changing.
The PMI/Markit surveys suggest that it is in Germany that the change in trend is the most important. We see that on the chart below. The improvement seen at the end of 2012 is over and this can reflect the slower pace seen in China (see above). We see that the 3 surveys have now a downside trend.
France PMI/Markit survey shows a marginal improvement. The synthetic index for the whole economy is higher. Nevertheless it is still on negative territory, meaning that economic activity is still decreasing. On Tuesday there was another survey on France that was published by INSEE the French statistical institute. The business cycle index associated with this survey and which synthetizes information from industry, services, retail trade and real estate was at its lowest since August 2009 (on this survey shown below the historical average is 100). New orders in industry dropped in the INSEE survey and stay low in the PMI/Markit survey.
There is no real change in trend. France is probably in recession.