Europe PMI Contraction Follows China

China’s PMI was just above or just below the dead line, depending on whether an HSBC survey or official number from the People’s Republic is correct. China’s factory activity has stalled or is falling some either way. EU data was even worse for December, a confirmation that much of the region’s economy has slipped into recession.

Official data from statistics firm Markit shows that PMI in the eurozone for December was 46.9, a sharp contraction. The figures for the quarter showed the worst factory activity since mid-2009, while the last recession probably was still under way.

The figures were much worse among the most troubled economies, though the figures are not particularly telling because several of these nations depend on industries like tourism for much of their GDP. Nonetheless, PMI in Greece was 42, and in Spain the number was 43.7. The number for Italy was barely better at 44.2. Every one of these countries has to have strong economic expansion for the next several years to bolster austerity budgets and bring down deficits. Otherwise, the global capital markets believe they will need hundreds of billions of dollars in bailouts and renegotiated bond terms. The latter would severely damage bank balance sheets in the region. In turn, those banks may need bailouts from their governments. The last alternative for these nations would be outright default.

Markit released data on unemployment two weeks ago. The figures were depressing. They showed that no recovery is possible for now, just as the PMI numbers have.

The new Markit report shows what almost every economist already knows. Europe has no chance to recover financially. The waves of this problem have started to reach China. The jury is still out on the U.S. It will not be more than a few months, though, before it is clear whether almost the entire world economy has started to contract.

Douglas A. McIntyre