Euro zone crisis hurting peripheral countries: Rob Dobson

In an interview to CNBC-TV18, Rob Dobson of Markit Economics says that global markets are still quite someway off those really low levels. However, there is a much deeper rate of contraction being seen across the euro zone.

“The German industry is massive for the euro zone manufacturing sector, if that is showing signs of decline, that’s going to have knock-on effects not just for the domestic market but also for trade within the euro zone itself,” adds Dobson. Below is an edited transcript of his interview. Watch the accompanying video for more. Q: The last few months, the market PMI reading in China has been showing a further contraction in Chinas manufacturing data whereas the government PMI reading was improving. Now we have for the first time in three months both index readings showing a decline. So the private sector reading is still in contraction phase, the government reading which is in expansion phase above 50 is slowing. What do you make of this data?
A: It’s a shame that the China manufacturing sector is definitely slowing. We are seeing the economy being hit by declining levels of new business. China is a country which is very reliant on exports but also has a growing domestic market. We are seeing from the reports in manufacturing that the domestic and the export markets are both showing declining order flows. Q: In the euro zone, the contraction seems to be worsening in the euro zone manufacturing data. Are we now back to the crisis levels that we had hit right after the global financial crisis?
A: We are not there yet. We are still quite someway off those really low levels we saw directly after the global financial crisis particularly around the time when the Lehman Brothers collapsed. What we are definitely seeing is a much deeper rate of contraction across the euro zone. Critically, what we are also seeing is not just the peripheral nations been affected by this.
We are now seeing the damage caused by the financial and political crisis in the euro zone also starting to spread across the region into some of the more core and bigger industrial nations such as Germany, France, Italy and Spain are also seeing very sharp rates of contraction. We have also seen a Netherlands contraction for the first time in a while.
This suggests that there is a spread of this weakness across the euro zone and that’s damaging, particularly, in the case of Germany. The German industry is massive for the euro zone manufacturing sector, if that is showing signs of decline, that’s going to have knock-on effects not just for the domestic market but also for trade within the euro zone itself. Q: Can you tell from the trend specifically for Germany and from the way the numbers have been declining over the last couple of months, how much worse this could potentially get? Is this a chronic weakness of some sort or could this be an aberration in the data or could it be a seasonal weakness of sorts?
A: It’s a nice bit of seasonal weakness just on the basis of the data we are looking at here is all seasonally adjusted. What we tend to look at if we are looking at how industrial outputs going to go in the months ahead, we sometimes look at what the trend in new businesses is, order books. If companies’ order books are declining then output is going to fall in the coming months.
What we are seeing in the euro zone including in Germany, we are seeing new order books contracting almost across the board. We are seeing export orders falling almost across the board and this suggest that the euro zone has been affected not only by its own crisis but also we are seeing the China PMI but also with the US PMI. We are seeing that some economic additions are weakening or slowing in the US, Asia and that is also going to have an impact.
Say for example Germany. Germany is a very big exporter particularly capital goods into the Chinese market. Now the China PMI both ours and the one from the statistics bureau showing that the China manufacturing sector is slowing and that’s having a knockon effect with Germany where we are seeing the German PMI at its slowest levels since the middle of 2009. Q: The Greece PMI reading is the surprising one that’s come in. It’s still in contraction phase but it seems that the pace of the contraction has narrowed or slowed. How seriously can we take that reading?
A: What we got to take in mind that the Greek manufacturing sector and the Greek economy in general has been contracting at a substantial pace for a number of years now and all we are seeing now is that Greece is still cutting along at the bottom, very short various contractions. That reading although itself is showing an easing, it is still a very substantial contraction.
But we are seeing other countries across the euro zone as this weakness spreads from the periphery, countries like Greece into the core, countries like Germany we are seeing those PMIs spreads between them narrow. The big surprise for me this month or not that big a surprise was the Spanish PMI. It actually fell below the Greek PMI and we are seeing a lot of news at the moment about the Spanish economy deepening, reduction in economic conditions there and that’s been borne out of this PMI data as well. Q: In the US, a slowdown in manufacturing but this is one country in which the manufacturing numbers are still in positive territory - above 50 as opposed to below 50. So we are seeing some growth but the rate of growth seems to be slowing. The only other country that I noticed in an above 50 number was India. These seem to be the only two spots where manufacturing continues to grow?
A: There were only a few countries, the US and India were notable, Canada as well. The Brazil PMI came out which was actually signaling that the Brazil manufacturing output contracted. If you think about the US, it’s a positive thing for the global economy if the US manufacturing sector continues to expand.
Obviously it’s a very big manufacturing sector, it sucks in a lot of imports, it is a big exporter. So seeing that not coming down too sharply is pretty positive. But North America and India were really the only bright spots. There was a little bit of growth seen in Japan but not really of any note. So again I would say that that would be the only price prospect we are seeing. Q: There have been several calls over the course of the last few weeks for more central bank intervention whether its the Fed, its the ECB, it’s a third round of LTRO or it’s a third round of QE. Do you think that could help the manufacturing picture at this point in time or is confidence so low that any central bank easing will take several months to feed in as positive news to the manufacturing sector?
A: Where the immediate effect of those monetary easing or QE polices were to be expanded, it would be a sudden shot in the arm for confidence and the confidence is the oil which lubricates the wheels of the manufacturing industry and the global economy in general. If we were to see that, that would potentially have a short-term benefit but what we really need to see is a lot of these structural reforms which are going on in the euro zone, we need to see some signs of the eurozone crisis easing and that will give more confidence.
 
What we are seeing in a lot of our European PMIs and this is particularly shown in the UK PMI data, people are reporting that not only are they in a defensive strategy but also their clients are in a defensive strategy. They are reducing purchasing, they are cutting their inventories and this means that things like output are unlikely to be covered in the short-term. We need decisive action and something which really makes confidence not only improve but improve and stay high.
We saw a shot in the arm at the beginning of last year, we saw manufacturing global economy beginning at 2011. We saw much faster growth in the first quarter. We are seeing a similar thing in the beginning of this year but then we see it moving off into the middle of the year. May be there is a possibility that we could see those types of QE coming forward in the coming months.