One of the most repeated messages among European financial analysts this week is this: “we are in a global slowdown”.
However, the sentence hides important nuances and very relevant differences. The European Union suffers a severe slowdown. The rest of the world only a moderate reduction in the pace of growth.
Data from the United States tell us something very different from what we get from the Eurozone.
Retail sales rose 1.6% in March in the US and the implied annualized growth rate for the first quarter remains above 2.1%. If we look at the employment data, the United States only sees a slight moderation in employment growth … But we are talking about the creation of 196,000 jobs, a figure that indicates much better growth. than other similar economies. The same applies to the latest manufacturing and service indices: They remain above 50 (in expansion). The Markit service index was 56.3 compared with an expectation of 54.8 and the compound showed a figure of 54.6 compared to the previous 54.3.
The economic surprise index of emerging markets also indicates an improvement. A strong but stable dollar (DXY Index) has not damaged the macroeconomic figures of the main emerging economies. It is true that the “usual suspects”, Argentina and Turkey, have seen their currencies plummet against the dollar, as they continue to implement counterproductive monetary policies of financing public spending with direct printing of currency. However, the macro data of most emerging countries as a whole is better than expected, and that must be acknowledged. Brazil was the latest to show a marked improvement in the Economic Activity Index in February. The prices of commodities have helped, but that tailwind is not the main driver. We cannot be complacent, but the recent capital outflows seen in March are modest compared to the inflows into February.
China has shown slightly better data in the recent manufacturing index as well. Their huge imbalances remain, and we should not indulge in complacency or optimism, as the Asian giant shows macroeconomic indicators improving within a long-term trend that has been signaling a clear deceleration since 2016. We must remain concerned about China’s indebted model, but it is still a trend of relatively weaker growth, not of stagnation.
So, where is there evidence of stagnation? In Europe and Japan.
Japan’s manufacturing PMI came at 49.5 and Output at 47.9. Both in 3rd-month of contraction.
The Japanese slowdown does not surprise anyone anymore, because it is in its third decade of stagnation repeating the same mistakes of disguising the demographic and productive model challenges with misguided Keynesian government spending policies and more debt.
The most concerning problem is Europe. A European Union that completely abandoned its reform agenda to bet it all on the mirage of monetary policy, while economic, demographic, state and political risks rise. The data from Germany remains poor, but the country enjoys enviable unemployment, trade balance and fiscal strength. However, in the rest of the Eurozone, the fragility of the economies is linked to both fiscal imbalances and excessive interventionism that make them more vulnerable to a change in the cycle. At least in France, from where I write this article, the debate on television and media is constant. The entire country is aware that the slowdown is severe and tax reductions and measures to strengthen economic performance are announced. The word “crisis” appears on the front page of newspapers and economic programs as a real possibility. In the periphery, countries must be aware that they have exhausted their fiscal space and acknowledge their vulnerability to a modest change of cycle. Spain is not immune to these risks. The OECD index of leading indicators already shows a negative figure and the leading indicators published by the Ministry of Economy also reflect more than ten in negative territory. That’s why the Eurozone should be more prepared. Because most countries do not have the capacity that others have to confront a slowdown.
The United States or the United Kingdom have buffers to face a slowdown. Most Eurozone countries are dangerously ignoring it and, even worse, proposing large government spending and high taxes as the “solution”.
All of you have read that the slowdown was due to temporary factors. It is not. The fall in the flash Composite PMI, from 51.6 in March to 51.3 in April was worse than the consensus estimate of 51.8.
Some demand a massive stimulus from Germany to address the problems of the Eurozone. Making the same mistakes as other countries is not a growth policy, it is a suicide action. It would not work. There is no evidence that Germany is importing less than it needs, quite the opposite. Its industrial utilization has risen from 71% in 2009 to 86% today. Meanwhile, private investment is at pre-crisis highs. We cannot ask Germany to make the mistakes of others to disguise the imbalances of its Eurozone partners.
The problem of the Eurozone is threefold: demographic, high state- and fiscal-interventionism, and lack of technological leadership.
If we add the political risk of some governments who want to penalize high productivity sectors while subsidizing those of low productivity, we have an economic challenge that will not be solved with liquidity injections and low rates.
With rates at zero and almost 1.8 trillion euros of excessive liquidity, the problem of the European Union is not the moderate global slowdown. It is perpetuating a rigid, intervened and extractive model.