Eurozone Recession Spreads to the Core of the Core

Yesterday's collection of Eurozone PMIs were truly dreadful. The real shocker was the reading of 47.4 from the Composite PMI, which was below 1SD from consensus, and was the result of  manufacturing PMI collapsing to a 34 month low, and services to worst for five months.  It suggests Eurozone’s recession is intensifying during 2Q12.  GDP fell annualized 1.3% in 4Q11, and central forecast for the Eurozone’s 1Q12 based on the Composite PMI  (which does a better job than either the manufacturing or services PMI) is a contraction of 0.9% annualized (with a 1SD range of minus 2.4% to +0.6%). And unless April’s trend reverses dramatically, 2Q12 looks like contracting 2.6% (range, minus 4.1% to minus 1.1%).  The consensus can live with annualized  1QGDP falling 0.9%, but the 2Q forecast is three times worse than consensus.

The Composite PMI isn’t unerringly accurate as a GDP forecaster: it has signalled quarterly contractions three times in the last couple of years, twice wrongly. In 3Q09 PMI signalled contraction of 0.9%, but GDP grew 1.9%; 3Q11 PMI signalled a contraction of 0.4%, vs an outcome of +0.5%; and in 4Q11 it signalled a contraction of 2.1%, considerably worse than the 1.3% contraction recorded.

Recession in the Eurozone periphery is no surprise. The worst of today’s news came from the core of the core. Germany’s manufacturing PMI slumped to 46.3 – its worst reading for 33 months. New export orders were particularly badly hit, as orders from S Europe dried.   France’s services PMI also collapsed to 46.4, its worst reading since October 2011 and only the second monthly contraction since then.  If German manufacturing and French services can’t grow, the Eurozone won’t grow.

Continued and intensifying recession makes every detail of the Eurozone’s fiscal pact more tenuous economically, politically and financially. 25 EU members agreed to cut fiscal deficits to 4.6% of GDP this year and 3% next year: bond markets and currency markets will find those targets much harder to believe today than yesterday.