In his latest Viewpoints note, Jim O’Neill addresses the intense pessimism toward the Euro zone.”Amongst many arguments the bears understandably make, is one that whatever the determination of the ECB (and perhaps others), the underlying fundamentals for economic growth in the Euro zone are so negative that the Euro zone project will remain plagued with an environment that means it will not survive,” he writes.
But O’Neill, the Chairman of Goldman Sachs Asset Management, doesn’t think things are all bad. From his note:
Most recent Euro-area cyclical economic data continues to be disappointing with the August manufacturing and services PMIs highlighting the weakness. Indeed the ‘final’ PMIs were weaker than the early ‘flash’ ones. This suggests momentum may still be deteriorating, or at least did through August.
However, there are three points the bearish voices should at least consider.
One, historically the Euro area has generally derived its aggregate economic performance as a ‘taker’ from the rest of the world and not from domestic Euro-area driven demand.
Two, as shown in the attached chart, Euro area financial conditions have eased considerably in 2012, especially in recent weeks prompted by the ECB’s action. While the statistical reliability of an FCI-type indicator as a leading indicator is less reliable than elsewhere, such as the US and China, it is very difficult to argue that such a degree of FCI easing is an unwelcome development. On the contrary, it is surely a rather helpful and welcome one, especially for the peripheral economies that have experienced most of this easing. Will the PMIs be so weak for the rest of the year and into 2013?
Three, as I’ve touched on previously, there are signs that some troubled Euro-area countries are improving their competitiveness. Credible measures of unit labour costs, as I have shown, demonstrate while there are plenty more required, improvements have recently taken place.
Here’s the chart he references:
Photo: Goldman Sachs
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