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Eurozone: It's Still Getting Worse (powered by Bank of America) |
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21.11.08 14:14 |
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Eurozone: It's Still Getting Worse
The dramatic plunge in leading indicators leaves no doubt whatsoever: the Eurozone recession will get worse before it may get better. Purchasing managers across the Eurozone are now more pessimistic than they have been since the regular surveys of PMI sentiment started some 10 years ago. Taken at face value, the results today suggest that the Eurozone economy could contract at a year-on-year rate of close to 2% by early 2009, even below our forecast for a 1.4% yoy decline in GDP in 1Q 2009.
Whichever way we cut and slice today's Eurozone data, they are dismal. The manufacturing PMI fell virtually off a cliff, hitting a new bottom at 36.2 in November after 41.1 in October. Note that October had already set a record low for this 11-year old survey. The intake of new orders seems to be drying up at a rapid rate, with the new orders component falling from 36.2 to 29.7. The situation now seems to be even worse at home than abroad as export orders, although also falling very sharply from 38.5 to 32.8, are not yet quite as depressed as the reading for orders as a whole.
Lacking new orders, companies are apparently preparing to lay off staff at a fairly rapid pace as the employment component fell by 3.1 points to 41.3. In manufacturing, prices now seem to be falling rather than rising. Probably reflecting in part the drop in oil prices, input prices tumbled through the 50 contraction/expansion threshold of 41.6 from 51.4. Output prices are now also falling according to the survey, having declined to 47.2 from a 51.6 reading in October.
On the services side, the PMI index fell from 45.8 in October to 43.3 in November, also a record low since the start of the series 10 years ago. The contraction in new business accelerated, falling to a decade low of 41.1 in November from 43.2. Business expectations edged down further to a very weak 42.0 from 42.3 while the employment index fell only modestly to 48.2 from 48.4, signalling a slight pick up in headcount reductions.
The almost synchronised downturn in manufacturing and services pushed the flash estimate for the composite PMI to 39.7 in November after 43.6 in October. The purchasing managers' indices are one of the most powerful leading indicators for economic activity, with a lead time over GDP of roughly one quarter. The November result thus points to an intensifying economic downturn in early 2009 after a significant contraction in late 2008 already. The risk to our forecasts that Eurozone GDP will shrink by 0.5% in 4Q 2008 and by 0.6% in 1Q 2009 is to the downside. The same holds for our call that 2009 GDP as a whole will fall by 1%.
The PMI data strengthen the case for a more aggressive ECB response. The chance that the ECB may cut interest rates by 75bp instead of the expected 50bp at its 04 December meeting continues to rise, in our view.
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