European economies showed further signs of stabilization in January with flash PMIs registering continued strengthening on most fronts (this week will see a number of actual PMI readings). The only noteworthy exception was France where conditions deteriorated further, with the composite reading falling to 42.6 (from 44.7 in December) and hence showing a sharp contraction. At the other end of the scale was Germany, where the composite showed 53.6 (up from 50.3 in December), an evidently positive surge in activity.
But despite the improvement it is important to remember that Europe’s economies are still contracting, and that the periphery economies are in general contracting more rapidly than those in the core. In addition, the PMIs show employment conditions deteriorating across the board. Eurozone unemployment hit a record 11.8% in November, and looks set to rise further, with countries like Spain and Greece now steaming onwards and upwards beyond the 25% mark.
Many former external deficit countries are now sharply improving their current account balances, but despite better export performance the impact is still not sufficient to offset the ongoing fall in domestic demand, and this doesn’t look set to change as they have to adjust their public accounts to bring down their fiscal deficits.
Even more importantly the sovereign debt clock is ticking away. The enduring recession, coupled with comparatively weak inflation and higher than necessary interest payments means that debt to GDP ratios are rising perilously in some countries. In Italy for example it stood at 127.3% at the end of the third quarter of 2012, according to Eurostat data released last week. This is up from 119.9% in Q3 2011. Another two years of GDP contraction, or a bout of negative inflation and this is going to be spiraling upwards out of control. Portugal’s position is hardly better, with a debt of 120.3% of GDP in October, up from 110.4% a year earlier. And even Ireland, which has been receiving so much praise for its efforts, saw the debt level rise to 117% up from 103.6% in October 2011.
And what happens next? Despite the evidence of stabilization the sharp rise in the Euro vis a vis the yen, in the context of very weak internal demand makes any serious rebound in growth look extremely unlikely, and as the fiscal adjustment continues there is every likelihood the the second half of 2013 will be just as weak as the last six months on 2012 were. This is definitely not the “up, up and away” moment.