- The collapse of an index measuring sentiment among French services companies was an extreme version of several negative-looking charts coming out of Europe last week.
- Junk bonds have gone through the roof, meaning the credit quality of European companies is getting worse.
- There is an industrial recession in Germany.
- The continent will probably avoid a full-blown recession – but it is looking fragile. Here’s a summary of recent data.
Economic data from France last week was so bad that one analyst simply wrote “?!” on a chart measuring confidence in the services sector. The survey in question was the INSEE services-confidence poll. It showed a cliff-edge drop in expectations from France’s non-manufacturing companies.
Here it is:
“The crash in the French services PMI looks completely out of whack compared with the INSEE data,” the Pantheon Macroeconomics analyst Claus Vistesen told clients.
That index isn’t the most crucial economic indicator in Europe, but its collapse was an extreme version of several negative-looking charts coming out of the continent last week. The European Central Bank said midweek that risks to the economy in Europe had “moved to the downside” largely because of a reduction in international trade caused by political uncertainty (i.e., US President Donald Trump and Brexit).
Among the bad news:
- Junk bonds went through the roof. Total issuance of junk bonds from non-financial companies (rated BBB) went parabolic, according to Bank of America Merrill Lynch, as more highly rated bonds declined. That means more companies are issuing worse debt. In recent history (2008-09 and 2012) the phenomenon was accompanied by a recession.
- PMI flatlines. The Eurozone Composite Purchasing Managers’ Index, a measure of sentiment in all types of companies, flatlined, pretty much as it did before the recessions of 2009 and 2012.
- Germany looks particularly bad. It may have just about avoided a technical recession last year, but its manufacturing/industrial sector is contracting – and that is the core of Europe’s largest economy.
- The German data is so bad that Vistesen said he thinks it might be an outlier or an error. “The headline (IFO) business climate index slid to a two-year low of 99.1 in January, from 101.0 in December, dragged down by a crash in the expectations index to 94.2, the lowest since the sovereign debt crisis,” he told clients on Monday morning. “These headlines are not to be ignored.”
- The same thing is happening in Britain. The UK is probably in better shape than the rest of the European Union because the pound was devalued because of Brexit.
There is some good news for the longer term. The broad consensus among analysts is that Europe will avoid a recession in 2019 but that growth will be weak. There may be a stronger pickup toward the end of the year.
But this is a continent wracked by a trade war with the US, a slowdown in China (one of its major trading partners), political paralysis around Brexit, a currency crisis in Turkey, and recession in a debt-ridden Italy.
One small example: Romania, with a population of just 20 million, doesn’t usually make headlines in the economics world, but over the past year its currency, the leu, lost 11% of its value against the US dollar. That is not as extreme as the losses in Turkey, Argentina, and Venezuela, but it’s not a good sign either.
It’s hard to put this all together and conclude that Europe will be regaining altitude anytime soon.
“The Eurozone economy needs solid growth in its core manufacturing sector to perform at its best, and at the moment, it seems like growth here is falling off a cliff, almost that is,” Vistesen said.