France and Portugal are adding to the German decline in the Euro area economy

This morning has brought more warning signs for the Euro area economy. This adds to the backdrop where the PMI business surveys have been suggesting a decline of 0.4% for GDP in the quarter just ended. This has been added to today.

The HCOB Eurozone Construction PMI® Total Activity Index — a seasonally adjusted index tracking monthly changes in total industry activity — rose slightly from 43.4 in August to 43.6 at the end of the third quarter. The index therefore remained well below the neutral 50.0 threshold to signal a further steep decline in overall activity. This also extended the current sequence of reduction to 17 months.

So the construction sector looks to be in a bad way and there is an initial irony here. As it is the sector most likely to respond promptly to interest-rates the mention of “17 months” will raise a cheer at the ECB along the lines of “if it aint hurting it isn’t working”. Of course that is also the problem that we have according to the PMI surveys more and more of the Euro area not working.

Now let me split away from the central bankers on the subject of PMIs as they take them literally whereas I take them as a general indicator. We can go to the house journal of the Bank of England which seems after some years to maybe have figured this out.

UK services activity contracted by less than first estimated in September, according to a closely watched survey published on Wednesday.The final S&P Global/Cips UK services PMI business activity index, a measure of the health of the sector, was 49.3 last month — down slightly from 49.5 in August, but well above the flash estimate of 47.2. ( Financial Times)

As you can see the PMI series really rather misfired there as it probably got the direction of travel right but the scale was completely wrong. In terms of more recent changes an additional issue may be seasonality with so much changing post pandemic. In addition problems for the series did happen post Brexit although the FT at the time under Lionel Barber was more than happy to surf that wave with the cake trolley instructed to arrive at the desk of any reporter writing about doom and gloom.

So returning to the Euro area we have a sequence of declining PMIs so there is economic weakness but the series accuracy is open to question. What about the official data then?

Retail Sales

There was not much solace to be found here.

In August 2023, the seasonally adjusted volume of retail trade decreased by 1.2% in the euro area and by 0.9% in
the EU, compared with July 2023, according to estimates from Eurostat, the statistical office of the European
Union. In July 2023, the retail trade volume decreased by 0.1% both in the euro area and in the EU.
In August 2023 compared with August 2022, the calendar adjusted retail sales index decreased by 2.1% in
the euro area and by 2.0% in the EU.

So a decline in retail sales making the annual number more negative. Again at first the ECB will be thinking that its interest-rate rises are working. Then the more thoughtful might mull the decline at peak tourism season as that is an economic strength for much of the Euro area.

Also as we look further into the detail we see that since 2015 the Euro area at 111 has under performed the European Union at 114.2 when it was supposed to be the other way around. Remember the numbers include the time called the “Euro area boom”. Also I note that France saw quite a drop in August ( 2.8%) which may provide backing for the PMI series which suggested a sharp decline there. Retail Sales can be erratic but the French one had been quite consistent until then.

Plus there was a 3% monthly fall in Portugal which no doubt added to the enthusiasm for the new mortgage subsidy that is now in play.

For two years, families will be able to ask the bank to make a proposal for a constant instalment that is lower than what they currently pay. This reduction is achieved by ensuring that during that period the interest rate does not exceed 70% of the six-month Euribor. ( The Portygal News)

There is an existing scheme so the total is now this.

Together, the two measures could mean savings of more than 150 euros per month, depending on the family loan. ( The Portugal News)

The issue here is something that was previously announced as a triumph which is the rising cost of property over there. Remember the excitement over Madonna buying a place in Lisbon as the Bank of Portugal smiled benovolently at the wealth effects. Well now it has morphed into this according to Euronews.

Many Portuguese, including the middle class, are being priced out of Portugal’s property market by rising rents, surging home prices and climbing mortgage rates, fuelled by factors including the growing influx of foreign investors and tourists seeking short-term rentals driving up prices that force local people out of their neighbourhoods.

If we step back it looks like an economy which via the proliferation of variable-rate mortgages is seeing quite a squeeze such that the government has felt the need to intervene. So we can see what it thinks the economic impact is.

This does have consequences as the ECB is supposed to set the ONE interest-rate for the Euro area and yet Portugal is going to have its mortgagees use a different one for a while. This creates quite a liability for 4 years time when this in theory ends and we may find Eurostat adding it to the national debt. That is before we get to the risk of interest-rates being at this sort of level in 4 years. Another Euro SPV in the offing? How many can you have?

Also I would point out that this is another feather in the cap for my campaign that you need to measure inflation properly. As housing has become unaffordable whilst the official inflation measure has been asleep at the wheel and recorded nothing.

So we can move on noting potential economic weakness particularly in France and Portugal.

Germany

You will not be too surprised to learn it was one of the weaker retail sales numbers and this morning has added this.

BERLIN (Reuters via PiQSuite.com) – Sentiment among small and mid-sized businesses in Germany, hard-hit by massive cost increases, weak demand and high interest rates, is back near pandemic lows, a survey showed on Thursday.

A study by credit agency Creditreform showed morale among the “Mittelstand” companies that form the backbone of the German economy has slipped back into negative territory for the first time since 2020, signalling a contraction in economic output.

Also there were the trade figures with exports lower.

August 2023
127.9 billion euros
-1.2% on the previous month
-5.8% on the same month of the previous year

The surplus was up but in a quirk of the GDP calculations because of this from imports.

August 2023
111.4 billion euros
-0.4% on the previous month
-16.8% on the same month of the previous year

Whilst some of the decline will be lower energy imports it is also true that the oil price was rising and offsetting some of this.

Comment

We remain in a situation where things are under pressure. Earlier this week the benchmark ten-year yield for Germany reached 3% and the Italian one reached 5%. The Euro has at times dipped below 1.05 versus the US Dollar adding to the inflation pressure. Whilst things are calmer this morning we can look wider an note one or two signals of a potential slowing in the US economy so of which are no doubt related to what we looked at yesterday. Also I note the “demand reduction” part below.

• Oil prices dropped by $5 on Wednesday in what appeared to be a significant shift in sentiment following a three-month rally.
• The EIA’s latest inventory report was the spark that ignited the crash, with gasoline inventories climbing by 6.5 million barrels and demand falling dramatically. ( oilprice.com)

As to the ECB it seems to have switched priorities these days if this from last week is any guide.

Tune in at 9:40 CET: President Christine @Lagarde

opens the Conference on Ensuring an Orderly Energy Transition, organised together with the @IEA

and the @EIB

.