Germany Loses Its Footing as Confidence Craters

May 24, 2012 by Douglas A. McIntyre

Early this morning, HSBC said its China Purchasing Managers’ Index in May slipped to 48.7, lower than expected. Later in the day, there was evidence of a sharp slowdown in the German economy. The Ifo Business Climate Index fell to 106.9 in May, which was down from 109.9 in April. The expectations index fell from 102.1 to 100.9. Another measure of Germany business activity — the Markit PMI data — showed Germany’s Manufacturing PMI at 45.0 (from 46.2 in April), a 35-month low.

The news was made even worse by Markit data for the entire eurozone. The Eurozone PMI Composite Output Index was at 45.9 (from 46.7 in April), a 35-month low as well.

Chris Williamson, chief economist at Markit, said:

The flash PMI indicated that the Eurozone downturn gathered further momentum in May, with business activity and new orders both falling at the fastest rates for just under three years. The survey is broadly consistent with gross domestic product falling by at least 0.5% across the region in the second quarter, as an increasingly steep downturn in the periphery infects both France and Germany. France is seeing the steepest deterioration in business conditions for three years, with the survey pointing to a marked fall in GDP in the second quarter of at least 0.5%. However, even Germany is at risk of GDP falling slightly in the second quarter if the situation continues to deteriorate in June.

The news will color the debate over stimulus versus austerity that has gone on at the EU summit, without any resolution to the path the region’s leaders should take. Germany remains unlikely to agree that any money should be invested in the eurozone’s weakest nations, even through the country’s leaders know that their position could knock Greece out of the union and badly damage the chances that Spain and Portugal can dig themselves out of deep recessions.

Germany actually could seize the numbers as a means to bolster its point of view. If the economies in Germany and France are frozen, they may need to take steps with regard to their own economies. And there is only so much money to go around.

Douglas A. McIntyre

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