TRADERS´ Blogs

One of the things European leaders were in agreement on at their latest crisis summit was the need for growth. That’s the easy part. Delivering it when the global economy is under pressure and austerity is being demanded of many eurozone nations is quite another matter. The latest purchasing managers’ numbers for the eurozone bear this out with the provisional readings for France, Germany and the eurozone showing that even supposed ‘core’ countries are struggling to keep their heads above water.

Both the services and manufacturing series were below the 50 level in Germany for the second consecutive month, something not seen for three years now. Over this time, German exports to China have more than doubled, but have stalled over the past six months (looking at the underlying 6mth trend). For exports to the US - the largest export destination after France - there have also been signs of a slowdown, although less pronounced than of those headed for China. At the same time, there are few signs that the domestic economy is ready to take up the slack, with demand at home falling 0.3% in the first quarter (the first decline for more than two years).

Remember also that Germany is the European economy that has done the hard work, keeping labour costs competitive and reforming labour markets in the early 1990s (the unemployment rate is currently lower than pre-crisis levels). Indeed, Germany used to be known as the ‘sick man of Europe’. It is therefore a little ironic that Moody’s has put the country on negative outlook, but this is mostly due to the potential for Germany to have to share the burden of the mistakes of others. The reaction to the news has been seen in bond markets particularly, with German yields rising around eight basis points. The single currency has largely held up following the initial move lower, because Moody’s is telling us what we already know - that Germany may have to shoulder the burden of saving the euro. The single currency knows that, but finds it hard to deal with whether it’s a good thing or not.