Europe – Recession Looks Deeper, Also in the Core

Outside the countries that are in the limelight due to the crisis, the picture  isn’t  encouraging. This can be clearly seen in PMIs and business sentiment indicators.

So, if investing in the euro is like investing in the core countries, the value is certainly dropping.

Without any GDP releases in October, these major figures will have a relatively strong impact outside the nonstop debt crisis news.

France, Europe’s second largest economy, has seen its purchasing managers’ indices plunge. Manufacturing took a plunge from 46 to 42.7 points, indicating a faster contraction of activity.

These levels haven’t been seen since the peak of the crisis. Also the services sector, that was doing OK so far, saw a free fall from 49.2 to 45 points – from almost break even to significant contraction.

In addition, there is growing discontent about the government’s policy: François Hollande rejected austerity but is now finding himself doing it in his own style. The proposed budget for 2013 and the accompanying measures triggered some public anger.

PMI numbers are forward looking figures: if they are below 50 for a long time, this implies recession. France has seen flat GDP for three quarters. This is not an official recession, but this is not enough, given the fact that France carries a significant burden in aiding other countries.

Germany’s PMIs are better than France: 47.4 in manufacturing and 49.7 in services. The manufacturing sector saw a rebound from multiple year lows, but is still in contraction. The services sector is not showing convincing growth.

The German business sentiment indicators remain in negative ground as well: ZEW has improved, but only to -18.2 points. The IFO figure fell for a third consecutive month, and reached 101.4 points.

Also Italy that has currently moved away from the spotlight is not doing well. The euro-zone’s third largest country is not suffering flat growth or a mild recession but from a hard recession. High contraction rates each quarter (-0.7% and -0.8%) plus continuing drops in retail sales and industrial production weigh on the country.

Italy continues to hide behind Spain. A solution for Spain will make things easier for Italy, while a worsening situation in Spain makes things harder for Italy.

This article is part of the October monthly forex outlook. You can download the full report, including the currency technical outlooks and the relative strength index by joining the newsletter in the form below.

Further reading: Euro to dollar forecast.