Weak Recovery

In November, activity in the eurozone continued to increase. However, the recovery remains weak and there is no concrete sign, at least for the time being, that it might strengthen over the coming months. This is the main message coming out from today’s PMI survey data. The Composite PMI for the whole area came in at 51.5, down by 0.4 point with respect to October. Although it remained in expansionary territory, the index signals a GDP growth rate of only 0.2% q/q.

■ The country breakdown was quite mixed. While the recovery is gathering pace in Germany, the opposite occurs in the other largest economies of the zone. The French Composite PMI for activity fell back in contraction territory in November, to 48.5, losing 2 points in one month. Lower levels of demand and uncertainty regarding the general economic climate seem to be the main factors weighing on business confidence. The French index is now consistent with a moderate contraction of GDP in the final quarter of the year. The rest of the zone was still growing in November. However, the pace of growth remains weak and the rate of increase is slowing.

■ The details of the survey show that the weak pace of the recovery, combined with uncertainty surrounding the economy are preventing firms from hiring. Over the last 2 years, the employment index has been constantly below the 50-mark, and currently it is just suggesting that the pace of contraction is easing.

■ Sluggish activity is forcing firms to cut prices, despite firms’ input costs continued to increase. For the time being it seems that firms prefer squeezing their margins, keeping their market shares. Still, this is far from being an optimal outcome and it cannot last.

■ To sum up, with the exception of Germany, the recovery in the zone remains modest; today’s data even hint that some country might fall again in recession. The recovery needs to be supported. The December ECB meeting will be closely watched. On that occasion the Bank will present its new projections for growth and inflation which will include 2015. Should the Bank forecast inflation well below its objective for price stability (close but below 2%) in both 2014 and 2015, this might open the door to further actions.

BY Clemente DE LUCIA

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