October 3, 2007
Ouch – the euro economy is feeling the credit crisis
For those who were hoping that the euro economy would get through the global credit crisis unscarred, the past week has brought bad news: Survey data in Europe instead point to a significant dent in growth. Now the interesting question is whether the economy will recover quickly or whether the consequences of the credit crisis will linger on.
All important survey indicators have recorded a substantial drop in September. Across the continent, firms reported a drop in current conditions as well as in the outlook. For the manufacturing sector, France recorded the most notable result with a drop of the purchasing manager index (PMI) having dropped from 53 to 50.5 points. Both the French and the Spanish PMI (at 50.8 points) are thus only slightly above the 50-points-line which marks a stagnation of the manufacturing sector. Obviously, in these two countries, manufacturing has been especially hit by the strong euro.
The German manufacturing sector is still doing comparably well, but there are other details in survey indicators for Germany which are reason for real concern: First, hiring intentions by the corporate sector as recorded by the ifo-employment index fell by 1.4 points to the lowest level since October 2006 (see here). Second, the service sector PMI for the German economy experienced the biggest fall ever from 59.8 to 53.1 points.
This developments bodes badly for the future outlook as optimists had long been argueing that German consumption could soon become an engine of European demand growth with employment and thus disposable income growing again. Up to now, however, there has been extremely little evidence of any pick-up in German consumption. With the pace of employment growth now slowing, this story becomes even less convincing. In addition, the large drop of the service PMI (which according to NTC which conducts the survey extents well beyond the financial sector) hints that companies are now also beginning to write off their hope of a substantial consumption bounce.
This weakness in German consumption demand is certainly a lagged effect of both years of wage restraint and the VAT hike by three percentage points in January 2007. So, in the end, there is the danger that German politics again has deprived this upswing of the resilience needed to withstand the global credit crisis.