Europe's PMI turns down

The dotted lines show the PMI indices for manufacturing/services for the Euro Area, each extreme-adjusted (by me) to remove "spikes".  The solid red line shows the average of the other two.  

Up to two months ago, the red line had been rising, pointing to an economic recovery.   Normally, manufacturing and construction lead services, and the manufacturing PMI has been falling, so the fall in the services PMI probably isn't a fluke, but a response to the downturn in manufacturing,

China's PMIs have picked up fractionally, but Europe's, the USA's, Brazil's and Canada's manufacturing PMIs are falling, with most other countries' going sideways.

Again, not recession, at least not yet, but clearly stagnation. 

 

Economic growth is fizzling out

China has just released its official year-on-year industrial production growth rate for November (4.8%, down from a peak of 7.7 % in March).  November's data for US and EA (Euro Area*) industrial production are only available through October 2025.  I have a function which estimates additional month(s) of data for a time series.  It calculates the next month via three different techniques and uses the average of these three values as the forecast.  I have thus been able to estimate an average for industrial production for China, the US and the Euro Area through November.

The chart plots the 6-month rate of change at annual rates in the unweighted average.  These are the three largest economies/economic zones in the world, and allowing for Chinese overestimation of GDP, are roughly equal in size.  The 6-month rate of change is slowing for all three zones: China peaked in March 2025, and has been decelerating since; the US peaked in June this year; and the EA in April this year.

Growth for the average of the 3 is still positive, just, but the trend is down.  Note again the pattern:  an accelerating recovery in the world economy from Q4 2024, fizzling out as Trump's tariffs disrupt economies and increase uncertainty.  

How low can it go?  Well, there is the powerful (lagged) influence of falling interest rates, which should be holding the world economy up, offset by the more immediate impact of the increased uncertainty and trade reductions of the tariff war.  So we may see stagnation rather than recession.  

*EA = Euro Area/Euro Zone, i.e., the countries which have the Euro as their currency.

Europe's weak recovery

 S&P Global's PMI for Euro-zone manufacturing looks as if it is still in an uptrend, and it is toying with the 50% recession line.  But it's very far from a boom.  Yes, the PMI is up from its low of 43 in 2023.  43, by the way, is consistent with a deep recession.  But it's been flat for the last couple of months.  The European Central Bank (ECB) has made it clear it's not going to act to fend off a slowdown or recession caused by Trump's trade war--a mistake in my opinion. 

For now, I'd say the European economy is troughing, i.e., diffusion indices like the PMI are at 50%, meaning there are more respondents with improving sales/production/employment than there are where those are falling. The recovery has prolly begun, but don't go looking for a robust upswing.  The ECB may well have to go back to cutting rates again.  Trump's swingeing tariffs on China are leading to China's exporters looking for new markets, with the effect that China's deflation is being exported to Europe.  Inflation is not going to be Europe's problem over the next 12 months; growth is.

Europe's economy on the mend

The chart shows the extreme-adjusted PMIs for manufacturing and for services for the Euro Zone (those countries which have the Euro as their currency), and for the average of manufacturing and services, which should be a good proxy for GDP growth.  

The PMIs have now crossed the 50% "recession line", meaning that output is at last starting to expand, in response to interest rate cuts by the ECB.  Will this recovery be derailed?  Obviously, that's a possibility, but Trump's tariff pagaille is likely to be worse for the US than for Europe.  Tariffs will cause a surge in inflation in the US, reducing real incomes and consumption, while also simultaneously delaying further Fed rate cuts.  

Meanwhile, in Europe, the EU has agreed to increase defence spending, and to allow increased debt to pay for it, and you may be sure that the increase in defence spending will go towards European (& perhaps Canadian) rather than American contractors.  Also, the ECB has leeway to cut interest rates again, because inflation is low, whereas the Fed does not.  

The sum of US stagnation/recession, a European recovery, and an Asian upturn (PMIs have started rising there again, after slumping when the tariff war started), means that world growth will improve.  But it won't be a boom, that's for sure.

Europe's recovery

For the most part, PMIs tend to move more or less in line with business confidence.  This particular business confidence survey just covers industry, like the PMI (there is also a services PMI, not shown).  Like the PMI, the business confidence index is a weighted average of several survey results:  production trends, order books, export order books, stocks, and production expectations.   The PMI uses slightly different surveys, is taken at a different time of the month, and different weights, so one would expect to see some differences.  

But the PMI is rising strongly and is almost above the 50% "recession line", while business confidence had started to rise, but fell sharply in June.    So which should we believe?   The PMI includes employment, whereas the business confidence index does not.   But the employment subsector of the PMI also fell in June, though only slightly.  So that can't explain the divergence.  

Some other clues.  Euro Area (countries which use the Euro currency) industrial production picked up over the last year to March, but fell in April, probably because of Trump's tariffs.   The volume of retail sales in the Euro Area fell sharply in May, after recovering over previous months.

My perspective is that Europe has indeed started to recover, but the tariff mess has paused the recovery.  

The EU makes up about the same percentage of world GDP as the US does, around 22%.  If, as I think, the US goes into recession and the European recovery falters, a global recession will be inevitable.

Big 5 still strengthening (just)

The "flash" (provisional) PMIs for the big 5 economies (US, UK, Euro Area, India and Japan; there is no "flash" PMI for China) rose a little in March.   Together, they make up just over half of world GDP. Each component has been extreme-adjusted to remove outliers.  Europe is recovering (see lower chart), Japan is weakening, and the US is mixed (we don't know yet just how much Trump's trade wars will reduce US economic activity).  So, on the evidence so far, the world economy is continuing to improve, slowly.

Canada and Mexico are both falling into recession.  How much their slowdown will impact the USA remains to be seen.   And Europe's embrace of deficit spending and defence spending using European (not US!) suppliers, Europe's growth will surprise on the up-side.

Bellwether Euro economy picks up

 Austria, an entrepôt economy at the centre of Europe, is a good bellwether for the whole European economy.  It's one of the first final PMIs to be released (the other early releases are "flash" or provisional, based on available responses, usually 85-90% of the normal sample).

After a mid-year slowdown last year, it's started to rise.  It's still not above the 50% recession line, but I'm becoming more and more confident that the European economy is above to start growing again.  They will certainly need it: military spending will have to increase by 1 to 2 % of GDP.  A bit of growth elsewhere will make the pain of that less onerous.

Data through Feb 2025

Europe's PMI finally starts to rise

The red line shows the average of the services (blue dotted line) and the manufacturing (block dotted line) and should be a proxy for the level of activity in the whole economy.

Not that this average is still below the 50% recession line.  In other words, Europe is still declining, only, now it's declining more slowly.  Actual expansion still looks to be a couple of months away.

Europe's recession deepens

 The chart below shows the extreme-adjusted PMIs for manufacturing and services, and their unweighted average.  Being diffusion indices, when PMIs are below 50%, they show that the majority of components/respondents are falling.  Hence, it's called the 50% recession line.  All three time series are now below 50%, and falling.

The ECB (European Central Bank) is staggeringly inept.

European recession deepens

The chart below shows the Euro-zone (i.e., the countries which use the Euro) PMIs for manufacturing and services, both extreme-adjusted, and their average.  

Manufacturing (dotted black line) is now as bad as it was during the covid crash (extreme-adjusted), and heading towards the GFC (2009) lows.  Services (i.e., retailing, restaurants, travel, hotels, etc.) --- the dotted blue line --- were much worse affected by the lockdowns. Pent-up demand led to the early-2023 services "revenge spending" bounce, which lifted the economy, but which is currently fizzling out.

Why so much weaker than the USA, despite equally stringent monetary tightening?  The misnamed "Inflation Reduction Act" has stimulated the US economy, but no similar program has been enacted in Europe.  Proof positive (if you needed it) that fiscal stimulus works.  Biden is returning us to the 1945-1984 Keynesian consensus, where the Federal Government was intimately involved in mitigating deep recessions.  The long-term implications are interesting, politically and economically.   For example, the divergence between the US and Europe suggests that Europe's interest rates may have peaked and may start falling soon, while, even if you believe that the Fed has stopped raising rates, the Fed Funds rate is unlikely to fall soon.

As usual, you should be able to get a clearer image by clicking on it