Unrelenting Recession in Europe

Data has been revealing the steepening pace of decline for European industrial production and manufacturing activity

Lee Davidson 22 November, 2012 | 12:00PM

It's here. The eurozone has officially entered into this second technical recession in the past three years by registering GDP growth of -0.1% for the third quarter of 2012.

The tentative optimism that characterised eurozone sentiment at the start of 2012 has completely dissipated. Mounting concerns about deteriorating economic conditions, slumps in manufacturing activity, and a decline in consumer spending have contributed to a continual sense of anxiety. Indeed, strengthening this thesis, eurozone output has faltered quite significantly as measured by the seasonally-adjusted GDP growth of -0.6% measured from only a year ago.

The tentative optimism that characterised eurozone sentiment at the start of 2012 has completely dissipated

At the onset of the European sovereign debt crisis, country risk was vaulted to the forefront of the economic discussion. At that time, the economic activity of core nations (e.g. France and Germany) was thought to be somehow shielded from the economic malaise of the periphery. While these arguments have worn tired as intra-eurozone trade has collapsed, country-specific third quarter GDP growth data still provided some support for this perspective. For the third quarter, Germany and France recorded quarterly growth of 0.2% each while annual growth came in at 0.9% and 0.1% respectively. Meanwhile, peripheral nations have continued to flounder in terms of growth led by Greece (-7.2% annual), Portugal (-3.4%), Italy (-2.4%), and Spain (-1.6%).

Worries Over Industrial Production & Manufacturing

Of all negative data pouring out of the eurozone, perhaps the most worrying is the steepening pace of decline for industrial production and manufacturing activity. In September, seasonally-adjusted industrial production nose-dived by 2.5% across the eurozone. Worse still, Markit's Purchasing Manager Index (PMI) data signal that the worst is not yet over. For October, the eurozone Composite Output index which measures monthly expansion/contraction of output, registered 45.7, where a reading above 50 indicates expansion. As measured by PMI data, overall economic activity in the eurozone has fallen for nine straight months and the pace of contraction is only quickening. The contraction is being led by drop-offs in new business orders (fifteen straight months of declines) and continued sharp declines in order backlogs. Consistent with a weak demand environment, average selling prices across the eurozone have declined for the eleventh straight month, according to Markit.

According to the European Commission's latest report, consumer confidence across the eurozone stayed steady at 86.2 in October, marking the ninth straight month where no improvements have been registered. Hard consumer data also points to a broad loss of confidence for eurozone consumers as retail sales in September declined 0.2% from August and 0.8% from last year. Given that consumer spending makes up roughly half of eurozone GDP, sustained declines in retail sales and other consumer-based metrics do not bode well for any upside surprises to near-term eurozone growth.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author Lee Davidson

Lee Davidson  is an ETF analyst with Morningstar Europe.