When the Eurozone moved toward the backloaded austerity paradigm, last Spring, I started to change my tune on Europe. In June, I wrote that we should watch second derivatives in the Eurozone, because the change in change numbers are a harbinger of a phase shift between recession and recovery. As with the US recovery in 2009, I have been cautious about calling this a recovery because we are still at stall speed. However, recent upbeat eurozone data signal the recovery in Europe is for real.
Eurozone economic data
As with the US in 2009, I have to caution that a technical recovery won’t feel like a recovery to most. That’s because a recovery begins just as a recession is ending, and a recession is a period of diminishing economic activity. Recovery, thus, starts from a position of diminished economic activity by definition. So the economy will be weak and the recovery won’t feel good. One has to look at the data to see whether the improvements can be sustained. I believe they can.
For example, today we saw a surprising lift in eurozone retail data. The retail sales numbers rose 1.4% month on the month in November after a 0.4% decline in October. This was the fastest monthly increase since November 2001. Moreover, on a year-over-year basis, which is more important for gauging time series sustainability, retail sales volume was up 1.6%. That was the best number since February 2008. Even laggard France showed a rise in retail sales in November. This is the best proxy for consumer demand we have. And it is showing that consumer demand is rising.
Other previous data show the Eurozone expanding as well. For example, in December the Eurozone-wide manufacturing purchasing managers index rose for the third month on the trot, with new orders rising to a two0and-a-half year high. The final PMI for December was still weak at 52.7, marginally above the break-even point for expansion of 50. However, as I indicated regarding recoveries, the numbers are always going to be weak in the beginning because one is leaving a period of diminishing economic activity. The key is the trend i.e. whether the numbers are lower or higher on a consistent basis across a wide variety of metrics.
In the US, a recovery is defined as occurring across a number of economic metrics like retail sales, GDP growth, industrial output, employment and wages. Employment is the laggard here because Eurozone unemployment is still at a record high of 12.1%, with 19.2 million people unemployed. Youth unemployment is 24.2% for a second consecutive month. When we see these numbers falling on a consistent basis. There will be no doubt that Europe is in recovery.
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