The euro zone economy is stuck in two divergent tracks, with Germany marching ahead and much of the rest of euroland continuing its descent into recession, according to the first key survey to reveal the state of the 17-member bloc as of the closing month of this year.
Euro zone output as a whole continued to shrink as fears over government finances hit business confidence. But the German economy grew in December, according to Thursday’s preliminary Purchasing Managers’ Index (PMI) from Markit.
Chris Williamson, chief economist at Markit, said: “The euro zone suffered its worst quarter for two and a half years in the final three months of 2011, with the PMI data suggesting that the region’s economy is likely to have contracted by 0.6 percent.” However, “the December survey revealed a widening contrast of performance within the euro zone”. The German output index rose to 51.3 from 49.4 in November—suggesting a bounce back in the economy, since 50 marks the dividing line between expansion and contraction. But the euro zone output index was only 47.9, indicating a decline in activity for the fourth straight month.
Germany’s relatively strong performance provides a rare ray of sunshine in the euro zone’s stormy economic picture. Although the recent PMI monthly surveys suggest that even in Germany growth is below its long-term trend, official figures show German employment at a record high. The country’s long-term outlook was briefly questioned in November by the markets, which pushed yields on the ten-year Bund above U.K. gilts for the first time in more than two years. But since then, strong German data have pushed Bunds back down to historically low levels, below 2 percent. This contrasts with consistently high Italian 10-year yields, which on Thursday closed just above 7 percent—the level regarded by markets as the danger point after which yields risk rapidly escalating out of control.
However, some analysts see the widening gulf in performance between Germany and much of the rest of the beleaguered euro zone as one of the obstacles to a potential solution of the euro zone sovereign debt crisis.
Despite the crisis unfolding around Germany, the ultra-low Bund yields show the situation has not thrown into serious doubt the German government’s ability to pay its debts. This makes it hard for German politicians to persuade ordinary German voters—or even themselves—of the need for radical action to end the euro zone debt crisis. This is particularly the case since several rescue proposals, such as encouraging the European Central Bank to print enough money to buy huge amounts of euro zone government debt, run counter to the anti-inflationary principles which were the lynchpin of Germany’s postwar economic miracle. Germany’s dominant economic power within the euro zone makes its cooperation key to any solution.
Aside from the strong German PMI figures, financial markets took comfort from the fact that Thursday’s survey suggested the euro zone economy may be shrinking less rapidly than before. At 47.9, the index was higher than November’s 47.0, indicating a deceleration of decline in the private-sector economy. This would not normally be considered great news but amid the welter of negative euro zone data, it struck a less apocalyptic note than much recent news. This helped to stabilise the euro, which earlier this week had fallen to an 11-month low against the dollar below $1.30. In U.S. afternoon trading it was at $1.301, up a touch on the day. Euro zone stocks were also bolstered by the survey, with the Eurofirst 300 closing 1 percent higher at 961.75.
