Sunday, August 28, 2011

28/08/2011: Eurocoin August 2011 - signalling sharp contraction

Euro area leading economic indicator, eurocoin posted a sharp contraction in August, confirming rapid slowdown in the economic activity.
  • Eurocoin fell from 0.45 in July 2011 to 0.22 in August, a drop of 51.1% - the sharpest since August 2008. This marks third consecutive month of declines.
  • Eurocoin 3-mo running average is now at 0.40 and 6-mo average at 0.50. Year on year, the indicator is down 40.5%.
  • The leading indicator is now reading within the band of 1/2 standard deviation from zero, making current growth reading virtually indistinguishable from stagnation.
  • The indicator is now at the lowest level since September 2009.
  • Annualized rate of growth is now running at 0.88%.
  • Inflation - per ECB latest data, is running around 2.5%.


Updated charts relating Eurocoin to the ECB policy rates show lower expected fundamentals-determined repo rate at 2.5-3.5% based on Eurocoin and 2.75-3.25% based on HICP - both well ahead of the current rate of 1.5%.
The core drivers for Eurocoin decline in August were:
  • H1 2011 growth rates (see earlier post here)
  • H1 2011 slowdown in industrial production - impacting Germany and Italy and contraction in industrial production in France and Spain
  • PMI Composite indicator through July 2011 showing contracting activity in the Euro area and in particular - Italy and Spain, plus significant deterioration in German business confidence (see detailed post here) and close-to-contraction reading in France
  • Consumer confidence remaining in contractionary territory for the Euro area and, specifically, for France, Italy and Spain
  • Sharp sell-offs in the stock markets across all 4 major economies, and
  • Zero growth in exporting activity in the Euro area, with sharply falling exporting activity in Germany, zero exports growth in France, near zero growth in Italy and contracting exports in Spain
In short, all components of growth forecast are showing substantial deterioration, with 3 out of 5 main headline readings in contraction and 2 main readings in zero growth ranges.
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