Euro Zone GDP Contracts, Not Out Of The Woods Yet

The European economy has continued to contract with the release of its January–March (Q1 CY2013) GDP data. The first quarter GDP data for the Euro region indicates a shrink of 0.2% on a QoQ basis and 1.1% decline on a YoY basis. In Q4, the economy reported a shrink of 0.6% and hence the pace of shrinking seems to have declined slightly. The numbers have come in line with the expectations. On a YoY basis, the contraction of 1.1% is the highest in the last 13 quarters.

Earlier in the week, the manufacturing PMI numbers came in better than expected. It stood at 48.3 for May 2013 against 47.8 in the earlier month. The reading indicates a contraction in the economy but it has bettered the earlier reading as well as the market expectations. The PMI numbers in Spain, Great Britain, Italy, France and Germany too came in better than expected. The last expansion in the manufacturing PMI was seen in August 2011 after which these numbers have consistently been on a down slope.

The service PMI numbers published during the week indicated a continued contraction. The Services sector is quite dominant in the Euro economy and it thus matters the most. The last expansion in the Services PMI was seen in March 2012 after which these key numbers have remained range-bound between 46 and 48.

There is a strong relationship between the GDP and the PMI numbers as both of them indicate growth (activity) in the industries and services. The Euro zone economy reported a decline in the GDP by the beginning of 2012 - six months after the services PMI numbers indicated a contraction. The recent consistent contraction in both services and manufacturing may well hold the growth in the region.

The downside in the region is not over yet and we may see a further contraction in the economy even as the world is talking about growth in Japan and USA.