France and the Netherlands moving in opposite directions

Today’s commentary

Europe’s recovery is still uneven. Recent data in France and the Netherlands show one nation with contracting GDP and the other with expanding GDP. When will the recovery begin in earnest?

Since it is Christmas Eve, I won’t go into a detailed answer to the question on Europe. I will keep this short. First, here are the data points.

This morning, both France and the Netherlands released third quarter growth estimates. According to Spanish website Expansión (link in Spanish). French GDP contracted 0.1% in the third quarter. This comes after a 0.4% decline in the second quarter. But the figures were terrible all around. Capital investment fell 0.4%. Exports fell 1.3%, following a 1.9% fall in the second quarter. While imports increased 0.9%, versus a 1.5% increase in the second quarter. The external sector thus subtracted 0.6% from GDP. France is not officially a member of the periphery. However, it is still the case that the internal devaluation tactic is important here. And none of these numbers speak to improving external competitiveness or to growth that can shrink France’s growing public debt.

The fourth quarter in France may be better. Let’s remember that employment has turned up for the first time in thirty months according to the most recent data point. However, the most recent composite PMI for France was at a seven-month low of 47.0, which suggests contracting GDP growth (Markit pdf here). In this report, firms reported continued staffing declines in addition to the slower output and slower backlog of work. In short, the forward looking data do not present a firm recovery picture. Andrew Harker, a Senior Economist at Markit writes:

The last flash PMI readings for 2013 paint a worrying picture on the health of the French economy. The return to contraction in November has been followed up with a sharper reduction in December, with falling new business at the heart of this as clients were reportedly reluctant to commit to new contracts. Firms will hope that such reticence e nds in the new year as they seek to avoid another protracted downturn.

By contrast, the Netherlands showed a marginal improvement in GDP. According to Dutch daily NRC Handelsblad, “the Netherlands is definitely out of recession” (link in Dutch). Growth for Q3 came in at 0.2%. The numbers are especially positive because the Central Bureau of Statistics is reporting an increase over its first estimate from November, when growth was estimated at 0.1%. There are a number of problems here however. First, the chart above shows one that the Netherlands is going through an enormously difficult economic period with year-on-year growth contracting for two years. Second, personal consumption remains weak. Despite the uptick in GDP, consumption dropped a massive 2.7%, making it 10 consecutive quarters of declining consumption in the Netherlands. Third, while the growth figures are not annualized as they are in the United States, comparison to the monster quarter in the US shows you just how weak growth in Europe is. NRC writes (my rough translation):

You see some things that are positive, such as the rise in exports. Not only have transit exports increases, but also ‘own’ exports of Dutch products have done. Negative issues that remain predominate, such as the continuing decline in household consumption and rising unemployment. Formally, we are out of the recession, but real economic recovery is certainly not the question. There are still too many data signals which are in the red.

The most recent European PMI data confirm further recovery in the Netherlands though. The Netherlands actually posted the highest manufacturing PMI score in the eurozone for November, with 56.8. The French were the worst at 48.4, by the way. And the composite PMI figures released last week were also positive for the Netherlands, whereas the =y showed France getting worse.

So what we see here is an uneven recovery in Europe. Italy, Spain and the Netherlands have joined Ireland in ending a string of falling GDP figures, however slight the gains might be. France, on the other hand, where there had been some marginal growth, looks to be in jeopardy of recession. Given the continued but lessening fiscal drag and the weak growth in consumption throughout Europe, the recovery will not begin in earnest at any discernible date in the near-term. Europe remains at stall speed, susceptible to a relapse into recession as we see with France. We will have to see if there are any negative or positive catalysts to change this picture as 2014 progresses. A Greek restructuring remains top on the list.

Happy holidays, everyone.