The overall economic activity in the Eurozone is showing signs of growth while that of China slows down. In the latest Markit’s Purchasing Managers Index (PMI), an indicator of overall business activity reported that the PMI of the Eurozone hit 53.2 in January exceeding last month’s PMI of 52.1. A PMI figure above 50 indicates business expansion while a figure below 50 is a sign of contraction.
A weaker manufacturing output both for domestic and overseas markets in China drove it’s PMI down to 49.6 in January coming from December’s PMI of 50.5. This was the first time in six months that China’s vast manufacturing sector shrank on account of lower growth. China’s economy is the world’s second largest. The U.S., meanwhile, suffered the same business slowdown slightly dropping to a PMI of 53.7 in January from a PMI of 55 last December.
Last year’s reports indicate that the Eurozone, a group of 18 nations using the same currency, might be in for a disastrous downward movement in its economic activities due to inflation, unemployment, and banking systems not yet functioning properly and that austerity measures are still the norm among the member-countries. Years of economic stagnation has bolstered this belief among observers of the Eurozone.
However, this month’s PMI paints an altogether different picture from what was previously depicted. The Eurozone’s growth this month is the highest it has been in the past two and a half years. Credit goes to export-based manufacturing, especially coming from the German front. According to economists at the French bank Societe Generale the German turn-around is being described as being “on fire” with this month’s reading at the highest since May, 2011.
In the same breath, caution was given by the same economists noting the weak performances of the other Eurozone member-countries. In particular, the divergent growth in this region is best exemplified by France’s January PMI of 48.8 indicating that the zone’s second biggest economy is still in the contraction mode.
In supporting the cautionary take on this growth of the Eurozone, ING Financial Markets economist Martin van Vliet mentioned, “that the Eurozone economy started 2014 on a positive footing…But we should not get too carried away.” He added “that this recovery is still in its infancy and fragile.” In Spain, the country’s economy grew by 0.3 percent during the last quarter of 2013.
China’s business decline can be attributed to the government’s austerity programs as well as the withdrawal of several stimulus measures. According to the senior economist at Credit Agricole CIB in Hong Kong, Dariusz Kowalczyk, in reference to the current PMI readings of China, “further slowdown in manufacturing and the entire economy” can still be expected for the second quarter of this year due to the above cited reasons. He expects that the country’s growth for this year will be 7.2 percent which is still below the consensus estimate.
In a Reuters report, many factories in southern China’s manufacturing hub have reportedly closed earlier than usual in preparation for the coming Lunar New Year celebration which is considered the country’s biggest holiday. The early closures can also be attributed to weak orders and the rising costs of production. This scenario prompted officials in Beijing to push for more reforms as growth drivers as well as to solve industrial overcapacity, increasing home prices and a growing debt.
Picking up momentum in the second half of 2013, the U.S. economy this month slightly decelerates. Data revealed that weaker manufacturing output is the leading cause of this decline. However, in the same Markit report as echoed by its chief economist Chris Williamson, the manufacturing sector’s output growth of around two percent per quarter is generating an estimated 10,000 new jobs per month. Thus, if U.S. employers keep adding this same number of jobs on a monthly basis there is no reason why people should be worried.
The overall economic activity in the Eurozone is showing signs of growth and is not just about exports but also in terms of domestic demand. This is in contrast to China’s economic contraction and in a smaller degree to the U.S. slow down.
By Roberto I. Belda