Thursday, 21 February 2013

Eurozone still stuck in recession

Sound bites: Eurozone PMIs highlight growing divergence strains

The Eurozone purchasing managers data highlight growing divergence strains within the Eurozone. The Eurozone economy as a whole is showing deeper cracks in the recovery outlook, but with deeply negative growth tendencies in most of troubled Eurozone nations, only being offset by continuing expansion in Germany. This is mostly export-led, but can hardly be relied on as a continuing safety net since so much of German external demand draws from the rest of the Eurozone. The slowdown evident in Asian markets also underlines further risks ahead for the German export sector. If there is a key message for the ECB, they cannot afford to ignore the euro’s recent strength for too much longer. Turning a blind eye to a strong euro hardly helps, while fears of global currency war rumble in the background. The weak US dollar and UK pound will be bringing much needed impetus to their respective home economies. But the stronger euro will become a bigger burden even for German exporters in the long run.  With the Fed Reserve already starting to hint that excessive QE may have to be curtailed sooner rather than later, it may help take some immediate steam out of the euro. But there may be a good case for the ECB to lean with the wind and start hinting at the economic benefits of a more competitive euro. The bias for ECB monetary policy should remain on an easier footing.

Highlights:
  • Euro zone business slump worsens unexpectedly in Feb
  • Flash euro zone services PMI sinks to 47.3 vs Jan's 48.6
  • Flash euro zone manufacturing PMI eases to 47.8 from 47.9
  • French activity shrinks at fastest pace since early 2009
  • PMIs point to 0.2-0.3 pct contraction


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