Flash Eurozone PMI tanks, Germany improved

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In October the Market Flash Eurozone PMI Composite Output Index fell to its lowest level since July 2009. It fell to 47.2 from 48.8 in September and marked the second consecutive month of contraction in private business activity in the Eurozone. The Flash Eurozone Services PMI Activity Index fell to 47.2 from 48.8 in September, while the Flash Manufacturing PMI dropped to 47.3 from 48.5 in September.

Worst hit among the major economies in the Eurozone was France. The French private sector experienced the sharpest contraction since May 2009 as the spill-over from the European debt crisis took effect. The Flash Composite Output Index dropped a massive 3.4 points from 50.2 in September to 46.8 in October. The main thrust of the contraction was in services, with the Flash Services Activity Index falling 5.5 points to 46.0. The manufacturing sector held its own, though, as the contraction eased to a three-month high of 49.0 in October from 48.2 in September.

In stark contrast, private economic activity in Germany accelerated as Markit’s Flash Germany Composite Output Index jumped to a two-month high of 51.2 – up from 50.5 in September. However, the acceleration was driven by the services sector as the Flash Manufacturing PMI slumped to a 27-month low of 48.9 from 50.3 in September. The Flash Services Activity Index registered 52.1 in October compared to 49.7 in September.

Taking into account France and Germany’s Flash PMIs, the Flash Eurozone Composite PMI indicates to me that the rest of the Eurozone’s private sector is firmly in the grip of a recession.

The GDP-weighted PMI I calculate for the Eurozone leads the year-on-year Eurozone GDP growth by one quarter. As it stands it indicates that GDP growth in the Eurozone will fall to 1% or 1.5% on a year-ago basis by the end of 2011. Year-on-year growth of 1% by year end will mean the Eurozone economy will register zero growth from the second quarter this year and the economy is therefore on the verge of a recession.

Sources: Markit; Dismal Scientist; Plexus Asset Management.

The outlook for the first quarter of next year is not rosy as the IFO Index (business expectations) for Germany, which leads by one month, points to further downside in the Eurozone GDP-weighted PMI through November.

Sources: Markit; Dismal Scientist; Plexus Asset Management.

It is clear that the ECB cannot rest on its laurels and should start to get ahead of the curve and act aggressively by cutting the repo rate without delay.

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More on this topic (What's this?) Read more on European Union, Investing in Germany at Wikinvest
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