By Marc Chandler There have been three flash PMI reports today, and each was surprising. China and Germany surprised on the downside while the French surprise was on the upside. HSBC’s flash read on China’s manufacturing sector weakened for the fifth consecutive month. The flash March reading of 48.1 compares with the final February of 48.5. The forward looking new […]
Tag: economic recovery
It’s not fashionable to be optimistic about Europe. But I have been a Europe bull since last April when we moved from the front-loaded austerity paradigm to a backloaded paradigm. And beginning in June 2013, I saw the data moving in that direction. Now the data now fully support this stance. But that’s the cyclical view. What about the macro secular story? Here the story is a bit more murky as it involves loss socialization, the continuing bank – sovereign nexus, and huge government debt burdens without the central bank backstop of a sovereign currency issuer.
Since October I have been saying that the US growth was probably going to decline for the remainder of this business cycle. In contrast, I have believed Europe would recover ever since data last June confirmed a broad based phase shift across the entire eurozone from worsening data to better data. The most recent data confirm this pattern becoming well entrenched. Some thoughts below
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.
Europe’s recovery is still uneven. Recent data in France and the Netherlands show one nation with contracting GDP and the other with expanding GDP. When will the recovery begin in earnest?
Now that Europe is on the mend, the initial phase of the financial crisis is clearly in the rearview mirror. Equity prices, bonds prices and house prices have risen by leaps and bounds even before this economic recovery was clear. Yet, the recovery itself is tentative, making plain the vast gulf between asset markets and the real economy.
My view since the beginning of the financial crisis has been that policy levers to alleviate this private debt stress are limited, and that this limitation will be felt in defaults, writedowns and deleveraging of a magnitude that is larger than usual for a cyclical downturn. Hence, the name of this blog. This view has been validated by events but now we are in a recovery. And so the question is why that view necessarily holds now that the crisis has past.
The global economic recovery continues as all of the most important economies in the world are on track for growth. Europe is the laggard and the tepid recovery there could still stall out. Below are some brief ideas on where this is headed and why.
Despite Europe’s continual moving of the goalposts to give countries more breathing room, the economic paradigm in Europe is still the same: austerity. This will dampen growth in Europe for the foreseeable future and increase government debt to GDP ratios, making debt deflation and crisis a background threat which will result in sovereign restructurings regardless of recovery.
Despite all the talk of recovery in Europe, the data suggest that the improvement in Europe is uneven at best now. The core has moved into a cyclical upturn but a lot of work remains in places like Italy and Greece. Today’s data points underscore this point.
We update our views on the main big picture drives for financial market:
(1) Fed tapering
(2) The stabilization of the Chinese economy
(3) The cyclical recovery in Europe
(4) The increase in Japanese purchases of foreign bonds
In spite of some positive economic signals out of the Eurozone, the area continues to struggle with credit growth. The latest loan growth measures still look quite bleak. We may however be seeing the first signs of the bottoming out of consumer credit, although the “improvements” are by no means compelling.