Eurozone business activity again on upwards path

  Business activity in Eurozone has being deteriorating for the past nine months. Last December however the PMI, index which measures this phenomenon, gave the first indications that the bottom of the dreadful U curve is now behind. In detail, the Purchasing Managers’ Index (PMI) for the industrial sector, being drafted on data over the demand for manufactured goods, stopped deteriorating and showed a first increase to 47.2 units in December 2012, from 46,5 in November. It must be noted that measurements of this index below 50 mean that the economy is in recession and above it in growth.Obviously PMI indexes for Eurozone remain in the negative region, but fortunately they stopped deteriorating for the first time after nine months. Germany is again spearheading the recovery of Eurozone’s economy, with the industrial PMI of this country at 50.3 points, just within the growth side again.

In the sector of services the relevant PMI index for Eurozone performed better than industry, reaching 47.8 points in December from 46.7 in November.

Policy measures

If the good news from industry and services, which constitute the powerhouses of Eurozone’s economy, continue during this current month of January, the new upwards path will consolidate the feeling that the policy measures taken by governments and the European Central Bank to overcome the fiscal and credit crisis, are on the right side. To be reminded that last December the EU Summit of the 17 Eurozone leaders has decisively supported Athens to solve its fiscal and sovereign debt problems. Given that the Greek tragedy has being for months the weak point for the entire Eurozone, this was a major breakthrough.

On the same line of effective policy decisions, ECB announced last October that it will support the prices of the Spanish and Italian sovereign bonds in the secondary market, using to this effect unlimited resources. The term “unlimited” was the magic word having restored investors’ trust in Eurozone’s debt paper.

Lower borrowing cost

During the first days of the New Year the yield of the Spanish 10 year bond fell below the psychological benchmark of 5%, after having reached the unsustainable level of 7% some months ago. On the same line Italian bonds pay now returns close to 4% in relation to 6.5% a few months ago, while France and Belgium now can borrow at interest rates close to 2%. With inflation slightly above 2% such interest rates are actually negative.

All those policy measures have not only restored confidence that Eurozone will soon return to an upward growth path, but they have also supported the parity of the euro with the dollar and greatly helped stock markets all over the world to regain lots of grounds. By the same token developments in the bond market have justified the draconian fiscal measures taken in Italy and Spain, drastically reducing borrowing costs for both countries.

Luckily enough the first positive indications come now also from the real economy, with the good news from PMI indexes. Of course there are uncertainties Eurozone has to face up this year, like the Italian elections. However if the new Parliament in Rome turns out a viable government, preferably with Mario Monti in it, then the rest of the year will be predictably positive for Eurozone.