Europe still sleeping even as Japan, Britain stir
Another month, another listless set of business surveys is likely to show this week just how much the euro zone economy still has to do to get over its debilitating debt and banking crisis.
An index based on a poll of purchasing managers across the 17-country bloc probably edged up to 49.1 in July from 48.7 in June, but remained below the watershed of 50 that would signal a resumption of growth, according to economists polled by Reuters.
The single-currency area, which makes up about 20 per cent of the global economy, has been shrinking since the fourth quarter of 2011.
Petr Zemcik, director of European economics at Moody’s Analytics in London, is penciling in marginal growth in the final three months of this year, but expects output for the year as a whole to drop by 0.5 per cent.
Some economists think the euro area might have just escaped recession last quarter, but Zemcik said: “We are still on course for contraction. The euro zone most likely contracted in the second quarter and might contract in the third quarter as well.”
The weakness is not confined to heavily indebted countries on the rim of the euro zone.
In Germany, the IFO business climate index for July is expected to have inched higher, but the economy is hobbled by the reluctance of firms to invest and by soft global demand: Germany’s purchasing managers’ index (PMI) for manufacturing has been stuck below the boom-bust line of 50 since February.
China, which takes nearly 7 per cent of German exports, is a particular source of concern. HSBC/Markit’s PMI for China on Wednesday is likely to produce another sub-50 reading.
“Looking at the current figures, in Europe there’s no light yet at the end of the tunnel unfortunately,” said Denis Pennel, managing director of the International Confederation of Private Employment Agencies in Brussels, which represents 140,000 firms around the world.
Demand for agency jobs fluctuates roughly in time with changes in GDP and is a leading labour market indicator. “I wouldn’t say there is a contraction, but there is definitely no growth,” Pennel said of Europe’s economy.
European Central Bank President Mario Draghi has dangled the prospect of cutting interest rates if the economy relapses, but Zemcik doubted that would make a difference as long as banks are failing to transmit the ECB’s cheap money to households and firms.
Reflecting the clogged-up credit channels, euro zone lending to the private sector is forecast to have shrunk again in June.
Away from the euro zone, there are signs of life stirring.
Britain’s quarter-on-quarter GDP growth is expected to have doubled in the April-June period to 0.6 per cent, and rising US home sales are likely to show the housing recovery on track despite a recent rise in mortgage rates.
And Japan is forecast to report a year-on-year rise in core consumer prices for the first time in 14 months. Economists expect an increase of just 0.3 per cent, but that would still be the fastest clip in five years.
That would give heart to the Bank of Japan, which is trying to end deflation that has dogged the economy for nearly two decades. The central bank is aggressively buying bonds to try to generate 2 per cent inflation within two years.
Even if the BOJ succeeds, Japan risks sinking back into a low-growth rut unless Prime Minister Shinzo Abe - now that Sunday’s Upper House elections are out of the way - fires up animal spirits by injecting competition into the economy and overturning old, inefficient ways of doing business.
“Accordingly, steady implementation of the government’s growth strategies will likely prove crucial in pulling Japan’s economy out of deflation over the medium term,” Tomo Kinoshita, Nomura’s chief economist in Japan, said in a note.
Kinoshita sees the next six months as a litmus test of Abe’s economic strategy, dubbed Abenomics.