Europe ‘No Longer Collapsing,’ Useless Data Shows

You can count on PMIs to deliver the “V”, and that’s good enough for market participants, who have demonstrated a propensity to ignore the inherent perils of substituting these gauges for “real” hard data.

The flash prints for Europe in June are encouraging, if you’re so inclined. In France, it’s all back above the 50 demarcation line — the services gauge, the manufacturing index and the composite, all of which came in well ahead of expectations.

In Germany, the rebound was more subdued, but the data beat nonetheless.

The accompanying color was less than ebullient, but things are certainly on the mend.

“Despite widespread reports of the reopening of businesses, demand conditions remained subdued in June, with new orders continuing to decline”, IHS Markit said of the French activity data. “That said, the latest reduction was by far the softest since lockdown restrictions were first introduced in March and moderate overall”.

The 12-month outlook for French private sector firms turned positive for the first time since the pandemic began.

“The latest PMI data suggests that France is finally entering a period of recovery as we move past the peak of the coronavirus crisis”, economist Eliot Kerr remarked. “The further loosening of restrictions has allowed some semblance of normality to resume, with many businesses and workers returning to work, particularly in the manufacturing sector”.

The tone is similar in the remarks around the flash prints for Germany, which IHS Markit said betray “increasing signs of life”.

“Latest data showed business activity edging closer to stabilization, down to the smallest extent by far since start of the coronavirus outbreak”, the release reads. Expectations turned positive.

“There was no separating manufacturing and services in terms of output trends in [Germany] in June, with both seemingly over the worst but far from firing on all cylinders”, IHS Markit’s chief economist Phil Smith said Tuesday. “Firms are starting to feel a bit more bullish about the outlook, but even so there are concerns for the labour market, with the pace of factory job losses hardly letting off in June”.

Readings for the eurozone (more broadly) show a similar recovery as services, manufacturing and the composite gauge all moved back within shouting distance of 50.

Again, I would note that these prints still show output falling, it’s just that the rate of contraction is nowhere near as alarming.

“To some extent, this is obviously a technical rebound”, ING said. “The fact that PMIs are still in contractionary territory illustrates the two messages: a sense of relief that a sharp rebound is possible but at the same time caution against too much optimism”.

“The flash eurozone PMI indicated another substantial easing of the region’s downturn in June”, Chris Williamson, Chief Business Economist at IHS Markit, said, summing it up. “Output and demand are still falling but no longer collapsing”.

Of course, none of this means the second quarter is going to look any better when the GDP numbers start coming in, but what it does suggest is that, to quote Williamson again, “the lifting of lockdown restrictions will help bring the downturn to an end as we head into the summer”.

Still, the color came complete with the usual cautionary quotables, prefaced with plenty of “buts” and “howevers“.

“The job market remains a particular area of concern, especially if demand fails to pick up sharply in coming months”, Williamson went on to say, just a couple of paragraphs after declaring that the downturn may be at “an end”. “We therefore continue to expect GDP to slump by over 8% in 2020 and, while the recovery may start in the third quarter, momentum could soon fade meaning it will likely take up to three years before the eurozone regains its pre-pandemic level of GDP”.

Let me translate all of this for you: IHS Markit doesn’t know what to expect, which puts them in the same boat as (literally) everyone else on the planet.


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