Friday, January 24, 2014

Eurozone Recovery – Slow and Steady

More positive data points came out of the Eurozone this week, suggesting the currency bloc  may be moving toward its stated goals of recovery and debt reduction. But this improvement is being pursued at a gingerly pace.
Firstly, January’s advanced purchasing managers’
index (PMI) out Thursday, registered a pleasant surprise as the indices jumped to more than two-year highs. The PMI composite rebounded to 53.2, a two-and-half year high driven by a sharp upturn in the manufacturing sector (January advanced estimate of 53.9 compared with December’s 52.7). The services PMI also climbed to 51.9 (compared with December’s 51.0). New orders posted a strong rise, helping manufacturers step up activity. Signs of divergence among the member countries nonetheless persisted, with Germany’s indices sprinting past 55.0, while France witnessed a shallower decline. The employment sub indices however remained in a worrisome state, raising doubts about the health of consumption spending, the lack of which could dampen manufacturers’ interest down the line. In a similar vein, selling prices also continued to fall, signalling that businesses are still trimming prices to attract demand.

The second data release saw the November current account surplus jump to a record high of 23.5 billion euros from 22.2 billion euros a month back. While exports are gradually looking up, subdued imports have been the main support for the external balance. The significant surpluses in Germany in particular have been a key source of support for the euro and that looks likely to persist into this year.

Thirdly, government debt levels moderated to 92.7% of GDP in the September quarter from 93.4% the quarter before. While the headline is positive, member countries have shown varying degrees of fiscal restraint, with the peripheral countries still not out of the woods. Of interest, Greece debt levels stayed elevated at 171%, Ireland at 125% and Italy at 133%, way above Germany that is closer to 80%.