World Economy

Eurozone Starts With a Bang

Eurozone Starts With a BangEurozone Starts With a Bang

The eurozone, the global economy’s perennial laggard since the 2008 financial crisis, started the new year with a bang as fresh data showed a manufacturing increase in December in every country, Greece included.

The manufacturing purchasing managers’ index, published by Markit, came in at its strongest level in 20 months, at 53.2, up from 53.1 in November. Figures above 50 indicate expansion; below 50 indicates contraction, Yahoo reported.

The figures will be welcome news for European Central Bank President Mario Draghi, whose year-old quantitative easing program, initially set at €1.1-trillion ($1.2-trillion) but likely to go substantially higher, finally appears to be lubricating the economy while removing any immediate threat of deflation. The rising PMI figures were helped by the weak euro and oil prices that are close to an 11-year low.

But Markit chief economist Rob Dobson warned that it’s too early to say the eurozone’s sustained recovery is now assured. “While there is much to be positive about in these figures, the underlying picture is still one of solid yet unspectacular expansion,” he said in a note. “With eurozone manufacturing still some 10% off its pre-crisis peak, it looks as if the sector still has some distance to travel before the climb back to full recovery is completed.”

China Affect

The eurozone and the wider European Union also face an economic slowdown in China, which soaks up a lot of European exports, from cars to machine tools. Overnight, the Caixin/Markit manufacturing PMI for China was reported at 48.2 in December, down from 48.6 in November–signaling the fifth consecutive month of contraction. The new figure shows that the manufacturing slowdown is accelerating.

The falling Chinese PMI helped to trigger massive selling on the Shanghai stock market. By midmorning, European time, the blue-chip CSI 300 index was down 7% and might have fallen farther were it not for the automatic circuit breakers. The Monday rout came after a losing 2015 on the Shanghai market, which lost 45% of its value.

Among the eurozone countries, the star was Italy, the second-biggest manufacturer, after Germany. Italy’s PMI landed at 55.6, a 57-month high. Ireland and the Netherlands reported the second and third strongest PMI figures. Germany’s reading was 53.2, a four-month high. Greece came in at 50.2, a 19-month high.

Promising Growth

Economist Howard Archer, of IHS Global Insight, said the strong eurozone PMI numbers bode well for wider eurozone growth. Eurozone gross domestic product climbed only 0.3% in the third quarter and, backed by the manufacturing rise, should rise to 0.4% in the fourth quarter, he said. “Eurozone manufacturers are currently getting appreciable help from very low oil and commodity prices which is boosting their ability to price competitively to win business,” he said. “In addition, a weak euro is boosting eurozone manufacturers’ competitiveness in international markets.”

In the EU countries, Britain was the disappointment. Its PMI to 51.9 last month from 52.5 in November as new orders came in at their slowest pace in five years. But economists said that strength in the British services sector should overcome any weakness in manufacturing, which is relatively small by Germany and Italian standards.

In a note, ING Financial Markets said: “Overall, the economy remains strong and the case for a rate hike in 2016 looks very compelling. Although we continue to forecast a hike in the second quarter, the risks surrounding the EU referendum are beginning to build and the probability that the Bank of England will leave rates lower for a longer period of time is increasing.”

On Monday, oil initially rose, then fell, then rose again. By noon, European time, oil was trading up 1.6% in London, at $37.85 a barrel.