Europe is starting to fall into a recession, and it is starting to depress global economic activity. While I still believe that the global economy can grow if Europe falls into a recession, growth certainly would be slowed.
A possible fatal flaw with this decoupling thesis may be that Europe’s recession isn’t attributable just to the implementation of austerity measures to restore fiscal discipline. Increasingly, it’s looking like an old-fashioned credit crunch, as Europe’s banks are retrenching on their lending activities so that they aren’t forced to raise more capital, which is either very expensive or very scarce right now.
Europe’s Monetary Financial Institutions (MFIs) had a combined loan portfolio of €12.4 trillion during September, a record high. That’s $16.5 trillion, which well exceeds the $6.9 trillion in bank loans in the US. Facing higher capital requirements and fearing more losses on their sovereign bonds, the banks are likely to respond by reducing their lending, not only in Europe but around the world.
Of course, banks elsewhere might pick up the slack and the capital markets remain wide open to most corporate borrowers. Nevertheless, a severe credit crunch coming out of Europe could trigger a global recession. Hopefully, the latest Grand Plan to clean up the Euro Mess, which is discussed in today’s Morning Briefing (for our subscribers), is actually coming and will be effective at averting a European credit crunch. For now, the latest batch of global indicators shows that Europe is falling into a recession, while the global economy continues to grow, albeit at a slower pace. Let’s review some of these most relevant indicators:
(1) New orders dropped sharply during September in Europe. The euro area (EA17) industrial new orders index plunged by 6.4% following an increase of 1.4% during August. In the European Union (EU27), new orders decreased by 2.3% in September, after falling 0.3% in August. Excluding ships, railway & aerospace equipment orders, which tend to be more volatile, industrial new orders dropped by 4.3% in the EA17 and by 2.1% in the EU27.
(2) Capital goods orders led the drop in European orders. In September, new orders for capital goods fell by 6.8% in the euro area and by 2.1% in the EU27. Intermediate goods dropped by 3.2% and 2.1%, respectively. Nondurable consumer goods declined by 2.0% in both zones. Durable consumer goods decreased by 0.6% in the euro area, but increased by 1.1% in the EU27.
(3) The biggest losers among Europe’s manufacturers are those in the biggest economies. Among the member states of the EU for which data are available, total manufacturing orders fell in 10 and rose in 12 during September. The largest decreases were registered in Italy (-9.2%), Estonia (-9.1), France (-6.2), Spain (-5.3), and Germany (-4.4). The largest increases occurred in Denmark (14.0), Latvia (13.1), Poland (5.1), and the Czech Republic (4.8).