Here’s the problem in just a handful of words.
Germany is Europe’s strongest economy. Yet even its Purchasing Manager’s Index (PMI) fell to 46.2 in April from 48.4 in March. Any number below 50 indicates recessionary contraction. So the further plunge in its PMI has even Europe’s strongest economy sitting on the edge of a potential recession.
Why is that so worrisome?
As I showed in a chart on my Thursday blog, the current severe decline in Germany’s PMI is eerily similar to its declines just prior to the global market’s 1998 mini-crash, the 2000-2002 bear market, and the 2007-2009 bear market.
If that is not enough to be concerned about by itself, as reported this week, Europe’s second largest economy, France, saw its PMI remain in negative territory at 46.9 in April. And as a whole, the 17-nation euro-zone’s PMI plunged to 46.7 in April from 49.1 in March.
Meanwhile, the United Kingdom (U.K.), a member of the European Union but not of the euro-zone, has already reported that its economy has been negative for two straight quarters, officially in a recession.
Obviously, Europe is in serious trouble, and here’s why it’s not likely to get better anytime soon.
Austerity programs adopted to tackle the huge eurozone debt crisis by cutting government jobs and services are not only adding to economic weakness going forward, but are running into public protests, and further undermining consumer confidence.
Sunday’s elections in Greece and France are expected to reflect that unrest.
The election in Greece is projected to result in considerable political instability. The two major parties are seen as unlikely to receive a majority of the vote even between the two of them. That would make the formation of even a coalition government a formidable task that’s likely to result in the need for another election within months, and put Greece’s latest bailout package in jeopardy. To meet the requirements of the bailout, Greece’s government must come up with an additional $15 billion in spending cuts by June. Given its shaky financial condition, with its economy already mired in recession, that would be difficult enough for a government firmly in control of decisions, let alone a parliament expected to be severely fragmented between numerous political parties.
In France, it’s widely expected President Nicolas Sarkozy will lose the election to Socialist Party challenger Francois Hollande. That could also result in additional tensions in the eurozone if Hollande follows through on the issues he campaigned on, including insistence on renegotiation of the recently agreed German-led eurozone fiscal compact.
With Europe’s economies already seriously hurting, populations protesting the austerity measures, and its debt crisis now threatening to spread to Spain and Italy, the last thing Europe needs is more political uncertainty.
How important are Europe’s worsening problems to the rest of the world?
The United States may be the largest single economy in the world, but the economy of the European Union as a whole is larger.
That puts its importance as a global trading partner, and therefore the odds of its economy being a leading indicator for the rest of the world’s economies, right up there with the U.S.
That may be why even many of the 10 largest global economies outside of the U.S. and Europe, including China, Japan, India, Brazil, Russia, are already in fairly significant corrections even though their economies are not slowing as significantly as those of Europe. Perhaps they see what’s coming toward them.
Meanwhile, the U.S. market has been remarkably resilient in the face of not only the problems in Europe but the clear signs of its own economic recovery being in trouble again. The Dow closed at a new rally high just a few days ago.
Is that resilience a positive sign, or dies it perhaps create a concern that the U.S. market would have further to fall from here than markets in Asia and Europe if it should decide it also needs to factor a recession in Europe into its prices?