Weak Eurozone manufacturing in August suggests recession in Q3

By bne IntelliNews August 24, 2012

Tim Gosling in Prague -

While better-than-feared, weak manufacturing data for August is further evidence that the Eurozone is likely to stumble into technical recession in the third quarter of the year - a worrying sign for the small open economies of Central Europe that are so heavily dependent on the single currency area for export demand.

Markit Economics said the Eurozone's August Flash Eurozone PMI Composite Output Index (which includes both manufacturing and service sector output) was at 46.6 in August. While the number is marginally better than the 46.5% in July, a number below 50 still signifies a contraction in the index. Rob Dobson, senior economist at Markit said: "The August Markit Eurozone Flash PMI reinforces the prevailing view of the economy dropping back into recession during the third quarter of 2012."

The numbers show Eurozone business activity has contracted for the seventh successive month. "Taken together, the July and August readings would historically be consistent with GDP falling by around 0.5-0.6% quarter-on-quarter, so it would take a substantial bounce in September to change this outlook," Dobson continued. The Eurozone economy contracted 0.2% in the second quarter.

The silver lining for the manufacturing-dependent economies in Central Europe is that European manufacturing appears to be stabilizing somewhat after a poor July. The overall Eurozone PMI for manufacturing rose to a four-month high of 45.3 from 44.0 in July, leaving services to surprise by doing most of the damage, coming in at 47.5, down from 47.9 in July.

Meanwhile, the news saw the euro gain. Although the single currency was also helped by hints that further quantitative easing is on the way in the US, and continued expectation that the European Central Bank will act to lower Spanish and Italian bond yields next month, the euro rallied on the better-than-feared numbers in France and Germany.

The survey showed that the long-running contraction in French activity eased, with its composite PMI rising to a six-month high of 48.9. Meanwhile, Germany's manufacturing sector recovered somewhat from a terrible result in July, rising from 43.0 to 45.1.

That said, German manufacturing orders continued to contract for the sixth straight month, which is bad news for Central Europe's economies, which are particularly dependent on the German economy for export demand. The reiteration of a coming recession for the Eurozone is also unlikely to raise confidence in the Czech Republic, Slovakia and Hungary, all of whose economies rely on exports - the vast majority headed to the Eurozone - for over 80% of GDP.

The growing wariness of the Polish consumer, which is helping to slow even the EU's star performer through the recent tough times, is another trend that will not be helped by the numbers, given the dependence of Polish factories on European demand. As Dobson warns: "The downturn is still led by the manufacturing sector, despite its pace of contraction easing a little this month."

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