The Eurozone private sector expanded at a slower rate in February. However growth is still close to the EU’s two and one half year high. The slowdown came from France which is causing worries about its gross domestic product (GDP) growth early in 2014.
The Eurozone’s business activity has now expanded for eight months in a row. However growth has slowed. This is a reminder that the EU’s recovery is far from steady. The Markit purchasing manager’s index or PMI came in at 52.7 in February. The number is still close the 31 month high hit in January of 52.9. Activity has been expanding, rather steadily, since July 2013.
Looking at the numbers by country there is a contrast between Germany and France. German had much stronger expansion, leading the region while France contracted for the fourth straight month. Germany saw its fastest expansion rate and biggest growth in new orders since 2011.
The Numbers For France are Worrisome.
The sharp contrast between the French and German PMI increases the worrying divergence at the very core of the EU’s recovery. While the data coming out of France has not been solid, at times okay and at other times not so good, the private sector growth in France points, handedly, to the fragile nature of the single currency bloc’s fragile recovery.
The continued tepid nature of the French domestic economy is hindering better numbers coming out for the export growth. This suggests there is a risk that the GDP for France will contract in Q1 of this year. On the other hand, optimism over Germany’s economy remains strong. Germany is the backbone of the Eurozone. Its economy is the powerhouse that drives the region and its recovery looks more and more sustainable.
German Wages Continue to Contract
Germany has been accused for a long time of keeping wages higher than in the rest of the EU. The German statistic office showed that real wages contracted by 0.2 percent on an annual basis in 2013. This was the first real drop in wages since 2009. For the past six years Germany’s wages usually see a growth rate of about 0.5 percent a year. While this has been a small increase per year that hardly creates a consumption boom, it also does not entice Eurozone rebalancing.
This should give the European Central Bank (ECB) something to chew on. While Germany’s economy powers on, it does nothing to support the rest of the region’s recovery. It does nothing to balance the region and does not make the ECB’s job easier. Couple this with fears of deflation, we could have serious problems going forward.