What this Important Reading’s Saying About the Eurozone

By Sasha Cekerevac for Investment Contrarians | Oct 25, 2012

• Tweet
  
  
• 
  
  
• 
  
  
• 
  
  
• Email

• Tweet
  
  
• 
  
  
• 
  
  
• 
  
  
• Email

The eurozone financial crisis has been an ongoing topic of discussion for quite a long time. I can appreciate why some readers might be tired of hearing about the eurozone and the lack of economic growth within that union; however, I would remind Americans that what happens in the eurozone will certainly have an effect here at home.

The latest data have been a disappointment, as it appears that economic growth continues to elude the eurozone. The Purchasing Managers’ Index (PMI) survey, run by the financial information company Markit, is a great gauge to understand the true level of economic growth around the world. Currently, PMI data is available for 32 countries, not just the eurozone.

The latest eurozone PMI composite index came in at 45.8 for October, a drop from 46.1 in September. This represents the lowest PMI composite reading in 40 months. While the service sector PMI was up marginally to 46.2 for October, as compared to 46.1 in September, the manufacturing PMI declined to 45.3, as compared to 46.1 in September. (Source: Markit, October 24, 2012.)

There are two things to remember about the PMI readings: a number above 50.0 represents economic growth, and a number below 50.0 represents a decline in economic growth; and secondly, the trend is important. While the number below 50.0 represents declining economic growth, if the trend was improving, it would be a positive sign for the future. However, the worry within the eurozone is that these numbers are generally weakening, especially in manufacturing, which will weigh down the chances of economic growth.

Another worry for future economic growth within the eurozone is that business optimism has deteriorated, as the report showed that service-oriented firms have been the least optimistic about each following year since February 2009. New orders in the composite, a key component for economic growth, declined for the 15th month in a row. For the average eurozone citizen, jobs declined for another month, making it the 10th month in a row.

The main worry for the world is that all eurozone members are now seeing a lack of economic growth. While in the past, only the periphery eurozone members were in trouble, many U.S. companies weren’t affected because these nations, such as Greece, were quite small. Now we’re seeing drops in the PMI index in strong nations, like Germany. The manufacturing PMI for Germany declined to 45.7 from 47.4—a sign that Germany’s economy is beginning to weaken.

It appears that the eurozone crisis will continue for some time, as economic growth is needed to lift that union out of its difficult situation. However, with political maneuvering still occurring, there seems to be no plan for economic growth. All we hear constantly is bickering amongst the different politicians. This shouldn’t surprise anyone, as politicians around the world are quite similar in looking out for what’s in their own best interest. For American investors, I would certainly caution against investing in companies that have a large exposure to the eurozone, as economic growth will be lacking for some time to come.

Tags: economic growth, eurozone, financial crisis