Eurozone Recession to Continue Into Next Quarter

Eurozone Unemployment Through February 2013

Unemployment Worsens in Euro Zone –

Euro-Area Manufacturing, Services Contraction Worsens: Economy – Bloomberg.

Weak Economic Data Knock Sterling and Euro –

In order for the PIIGS to exit the debt crisis, they need to start running true surpluses to pay down their debts, but this will be impossible under current economic conditions.

Europe is in a recession.  Despite the mainstream media’s attempts to create a positive side to the story, there isn’t one.  Unemployment just hit a Eurozone record clocking in at 11.9%.  Markit PMI’s indicate that the economy will continue to shrink in the present quarter:

Markit Eurozone PMI February 2013

For over a year, Europe has remained in contractionary territory.  Worse, the divergence between Germany and the rest of the Eurozone is widening:

Markit Eurozone PMI February 2013 Selected Countries

The exception is Ireland, and this makes sense.  Note the Emerald Isle’s placement on this euro fair value chart:

Euro Fair Value

There are two pieces of information given as “good news” to balance the bad news reported.  This passage is from the Wall Street Journal:

Other data showed annual inflation in February fell to its lowest level in 2½ years, however, which could encourage consumer spending due to a reduced squeeze on household incomes. Lower inflation could also ease doubts among policy makers at the European Central Bank about giving more support to the struggling economy in coming months.

Basically, the low inflation rate should lead an ECB rate cut.  This is possible.  If the Germans do not see inflation as a threat, they may go along with a further cut in the discount rate from 0.75%.  However Rates are already low, and  further decreases will lead to frothier markets, not economic growth.

The first part of the passage is flawed logic.  According to the writer, lower inflation should lead to more consumer spending, but the reason for the lower inflation is that consumer spending continues to shrink.  Moreover, there is no factual basis to stating that lower inflation creates more consumer spending.  For proof, see Japan.

In the Bloomberg article, Draghi states that a recovery should begin later this year.  Throughout the crisis, recovery is always portrayed as being just around the corner.  Eurozone economic and fiscal predictions of have proven to be wildly optimistic.

The dirty secret of economic forecasting is that forecasts are not accurate past 90 days.  An economist may be able to tell you what is transpiring in the current quarter and give you a decent prediction for the next, but forecasts become no better than random guesses after that 90 day window.

From the available data, the current quarter will show a further contraction.   Since PMIs are not rising at a fast enough rate, I see another contraction for the second.  Budget deficits will be worse than projected in Italy and France.  Spain may see a stabilization of sorts, but at a very bad number like last year’s 10.2%.

The eurocrisis will continue to slog on.  The question is how long will markets continue to finance the crisis countries. While there are no fundamental improvements in sight, the ECB has a printing press and knows how to use it.


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