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Tuesday, 7 January 2014

Did Spain finally find the way up? Spanish PMI index hits 77 month record, according to Markit! Italy, France and… Germany (!) remain problem zones, when it comes to real economic growth.

I get knocked down, but I get up again
You're never gonna keep me down

“Tubthumping” by Chumbawamba…

It was arguably the corniest song of the nineties, but at this moment, it might perfectly describe my feelings towards Spain, as the country was:
  • boozed up on credit drugs from the large Spanish and European banks;
  • subsequently knocked down by its enormous real estate and bank crises;
  • after all written off, due to its lack of economic growth during the last five years and massive (youth) unemployment of more than 25% (50%); 

But look, the country is seemingly still breathing and it’s trying to stand at its own two feet again. If this is indeed true, it would be nothing short of a miracle.

Today, the British research bureau Markit presented the PMI (purchase managers index) data for the Eurozone. While “usual suspect” Germany was again in the top positions of the PMI lists for manufacturing and services and also Ireland was going very strong, there was one country that showed surprisingly sturdy progress: Spain.

I say surprisingly, as the problems of Spain during the last five years seemed enormous in size and very hard to solve. Now, it seems that there is some light at the end of the tunnel.

France, still the second economy of the European Union in GDP, showed on the other hand that it can be hard to change its economy for the better, when nobody wants to cope with the initially negative side-effects of such an operation. President François Hollande is reluctant to carry through drastic economic restructurings, as he expects firm opposition from the labour unions and the French population. Instead he seems to buy time and chase ‘the easy way out’ from this conundrum. 

The result is that French growth results have only been mediocre during the last few years; actually, the country even shows negative growth at this very moment. 

As a consequence, France seems to lose the connection with the other economies in the periphery that slowly start to show better results: Spain, Greece, Ireland and Portugal. These are all countries that took their bitter medicine and now seem to cure from a serious economic illness.

The following snippets are from the Januari 6 report by Markit:


The upturn in the eurozone private sector economy gained momentum in December. Although the recovery remained modest and fragile overall, growth of output was nonetheless recorded throughout the second half of 2013.

At a three-month high of 52.1 in December, up from 51.7 in November, the final Markit Eurozone PMI® Composite Output Index rose to its secondhighest level during the past two-and-a-half years.

Manufacturing continued to lead the recovery in December. Growth of production accelerated to its fastest since May 2011, as new orders improved aided by a solid increase in new export business. Service sector business activity also increased further, although the rate of expansion remained modest and eased to a four-month low. This mainly reflected the ongoing weakness of some domestic markets, hindered on the consumer side by stillhigh unemployment in certain nations.

Marked performance differentials also remained prominent between the member states of the currency union. Ireland and Germany stayed atop the PMI output growth league table, while Spain was the biggest mover over the month with its PMI output index surging to a near six-and-a-half year record.

Output in Italy held steady, while France was the only one of the big-four nations to report contractions of both output and new orders. 

Nations ranked by all-sector output growth (Dec.)
  • Ireland 58.6 2-month high
  • Germany 55.0 2-month low
  • Spain 53.9 77-month high
  • Italy 50.0 2-month high
  • France 47.3 7-month low

Ireland registered the sharpest rate of expansion in services output of the five nations covered, with growth rising to a near seven-year record. Spain also reported faster expansion – the strongest in nearly six-and-a-half years – while Germany reported slower growth than in November.

France and Italy continued to contract, with rates of decline broadly unchanged from November and similarly modest. Growth of new business at eurozone service providers remained lacklustre during December, as faster increases in Ireland and Spain were offset by slower growth in Germany and outright declines in France and Italy.
The subdued trend in demand meant that outstanding business in the euro area service sector declined again, extending the current sequence to two-and-a-half years.

Companies maintained a positive outlook for the sector in December, amid expectations that an improvement in underlying economic conditions in 2014 would support higher demand. The overall degree of positive sentiment rose to its highest since mid-2011, with confidence improving in France and Italy and remaining strong in Ireland and Spain.

German service providers were the least optimistic overall. Employment was broadly unchanged over the month in December, following marginal job losses in the prior two months. Payroll numbers rose at faster rates in Germany (two-year high) and Ireland (five-month peak). This was offset by ongoing job losses in France, Italy and Spain.

Comment: Chris Williamson, Chief Economist at Markit said: “The PMI surveys indicate that the eurozone recovery gained further traction at the end of last year. December saw the second-largest increase in business activity since June 2011 and rounded off the best quarter for two-and-a-half years.

“Most importantly, the labour market stabilised in December, ending a period of falling employment that lasted nearly two years. With inflows of new work accelerating, a return to jobs growth should be seen in 2014. However, while the region as a whole looks set for a strengthening recovery in 2014, growth is uneven, with France in particular having possibly slid back into recession late last year.

The upturn in the rest of the region may help bring about a return to growth in France, but the data are highlighting the need for structural reforms to bring about a more sustainable and robust recovery in the region’s second-largest economy.”

Being a 'perma-bear', I am the last person to declare the crisis to be finished in Spain.

The country has yet a very long way to go in order to definitely finish its financial and real estate crisis and make its economy more competitive in the long run, with more employment for both younger and older people. There is still too much troubled CRE (commercial real estate), where not all the necessary write-offs have taken place yet. Besides that, certain banks are still not financially sturdy. 

However, the fact that things seem to be slightly better there, is a hopeful sign for everybody who loves this country. A Spanish friend of mine on Twitter – Pablo Rodriguez – said the following about Spain: “Well, there was a huge improvement in competitiveness through better productivity and lower wages. A 2 years effort!”

I am generally not in favor of wage restraint and its ugly brother wage reduction. 

Nevertheless, it can definitely be a way to improve an economy, in which the wages have risen too high in comparison with the productivity. Such an economy has outpriced itself next to other countries, who can deliver the same goods for a much lower price. According to Pablo, Spain has done both necessary things: improving the productivity and lowering the wages.

France, on the other hand, still shows that a lack of both political and societal will to change, can bring a country into a state of trance. François Hollande, a French president that I put my hopes upon after the somewhat arrogant and disconnected Nicholas Sarkozy, still achieved much too little economic change in his country.

To me, it seems that Hollande looks too emphatically to Brussels and Berlin, hoping that they will magically solve the French problem in due course. Instead, Hollande should have looked in the mirror to the man who really can solve the French economic problems, by taking the hard, but necessary decisions.

Yesterday, I was browsing through the Eurostat statistics database to find the growth data that would help me to make my point: that France was indeed the sick brother of the large European economies.

Therefore I took the annual GDP growth data of the problem childs Italy and Spain, ‘European Champion’ Germany and ‘sleeping giant’ France between 1991 and 2013. I was in for a surprise, to say the least, when I created the following chart:

GDP growth in Spain, Italy, Germany and France since 1991
Data courtesy of: Eurostat
Chart by: Ernst's Economy for You
Click to enlarge
When I saw this Eurostat chart, I realized what a miracle Spain has achieved since the nineties. Of course, the country has had its share of massive troubles since 2008, but I’m convinced that there is still enough room for growth in Spain, once the economic problems have been solved there.

And compared to Germany and France, Italy is in surprisingly good shape, with a steady growth between 1991 and 2008 and a very limited decline since 2008. 

When Italy is able to cure from the typical Italian diseases, like corruption, organized crime, clientelism and political chaos, the country has also definitely enough growth potential left, in my humble opinion.

France shows again on this chart, what I already saw in earlier charts, which I created for other articles in the past: France has been in a situation of very moderate growth since 1991 and this ‘streak of mediocrity’ has not ended yet.

Yesterday, I heard on the news that strikers in France had taken two managers hostage at a Goodyear plant, which had been nominated for being closed downAt the time I thought: “I understand more or less why the French undertake such actions, but it is killing for their reputation and for their chances as a hub for foreign industrial and service companies”.

Besides that, it is also killing for political will-power to take the hard, but necessary decisions concerning the French economy. Every politician in France knows that economic reforms could lead to widespread and violent protests everywhere in France: instead, they rather look to Brussels.

To the objective eye looking at this chart, however, there is not one, but TWO 'sick men' in Europe that showed poor growth during the last twenty years: one of them is Germany, surprisingly.

This surprise result perhaps discloses the negative side-effects of the wage restraint policy that has been started by Gerhard Schröder around the year 2000.

In Germany, the exports are running like a clockwork and everybody wants German goods for the current (relatively) cheap prices, due to the wage restraint policy of Schröder and later Merkel. 

However, the German economy itself has actually been stalling in a French way since the year 2000, as a consequence of the consumer strike caused by the loss of purchase power, due to wage restraint. In other words, what Germany has been doing is financially choking its population for the benefit of successful exports. The aforementioned chart shows that this has not been a winning policy after all.

The objective viewer will state that the German economy showed considerable growth since 2009, in contrary to the other three countries. Then, I will reply to them that realizing growth, by taking away purchase power from your population for more than ten years, will rather kill than cure the economy in the end.

Too many German workers earn a monthly income that is too low to live from (f.i. from the so-called Mini-jobs, which only yield approximately €400 per month) and need an extra job to earn enough money. Others runs the risk of becoming victims of poverty.

Would the crisis not have started in 2008, Germany would still have been the economic loser of the Eurozone, instead of the glorious winner that it seems to be right now. That is a worrisome thought.

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