Europe, Particularly Germany, Recovers

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In the shadow of deep concerns about the viability of the sovereign debt of some of the eurozone’s weakest nations, the economies of several countries in the region showed progress this month. Even overall eurozone purchasing manager activity improved. It may be too early to write off the region as one well into recession.

Markit reported that:

The Markit Eurozone PMI Composite Output Index moved into positive territory for the first time in five months in January, according to the preliminary “flash” reading which is based on around 85% of usual monthly replies. The index rose for the third month running, up from 48.3 in December to a five-month high of 50.4. That signalled a marginal increase in private sector economic activity.

The figures show a situation well short of a robust activity, but they show expansion nonetheless.

The numbers were just as good, if not slightly better, for France. That is very important. France continues to be the second pillar of a eurozone bailout, along with Germany. A contraction of its economic activity could cause its leaders to withdraw some support, if only to ward off a revolt from a sullen electorate.

Markit reported:

Private sector business activity in France increased for the first time in four months during January. The Markit Flash France Composite Output Index, based on around 85% of normal monthly survey replies, recorded 50.9, up from 50.0 in December. Although indicative of only marginal growth, it was nevertheless the highest reading since August 2011.

Germany’s figures needed to be particularly good. Early signals of a recession there could kill the building of a bailout facility of 750 billion euro, with much of that funding coming from Germany. This, in turn, almost certainly would cause global capital market investors to exit their stakes in the paper of countries like Italy and Spain, which would drive borrowing costs there to unsustainable levels.

Markit reported about the region’s largest economy by GDP:

January data indicated that Germany’s private sector started 2012 with an encouraging rebound in business activity. The seasonally adjusted Markit Flash Germany Composite Output Index rose from 51.3 in December to 54.0, and thereby signalled the strongest pace of expansion since June 2011. The index has posted above the 50.0 no-change level in each of the past two months, with the latest improvement driven by both manufacturing and service sector growth.

It is too early to explain the reasons for the improvements. Perhaps consumer demand for goods and services in the eurozone is better than expected, although unemployment and housing data make that unlikely. The demand for goods and services in the U.S., China and the developing world may have improved after three years of recession. China’s growth has slowed, but GDP continues to advance at better than 9%. Many economists believe U.S. fourth-quarter GDP was much better. Consumer confidence, lower unemployment and tax benefits may have kept the momentum of America’s improvements into this month.

Forecasts of a eurozone recession were premature.

Douglas A. McIntyre

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