Euro Zone Could Get Out of Recession Sooner Than You Think!

What seemed impossible only a few months ago when data revealed that the euro zone is in a recession, now seems to be within reach. The most recent PMI (purchasing managers’ index) figures from the euro zone topped expectations and hint that the region would soon return to positive growth!

PMIs reflect the health of different factors which affect businesses, as data is collected from thousands of purchasing managers. Specifically, these figures measure employment, production, new orders, inventories, and deliveries. Since business activity comprises a sizeable chunk of an economy’s GDP, these PMIs have gotten a lot of market junkies excited about the euro zone’s growth.

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Highlights of the report

The euro zone flash composite PMI, which combines the performance of the manufacturing and services sectors, printed its highest reading since January 2012 at 50.4.

The biggest surprise in the report though, is France’s figures. Recent data from the euro zone’s second largest economy suggest that it has been struggling. Some analysts even say that it has been the region’s weakest link, as we saw its manufacturing PMI dip to the low 40s earlier this year while its services PMI lingered at its four-year lows.

But July’s readings, with its manufacturing PMI at 49.8 and its services PMI at 48.9, revealed that the private sector is headed for the better.

Meanwhile, Germany continued to show its resilience with both its PMI readings printing above the 50.0 baseline level that indicates expansion.

There are a few factors that contribute to these positive factors, namely the ECB’s growth stimulus measures, slower pace of austerity this year compared to 2012, and growth in the global economy that we saw late last year.

Don’t get too excited just yet

A closer look at the figures reveals that it’s not all good in the ‘hood though. Domestic demand remains very weak and this was particularly evident in French data, which showed that domestic orders declined. In addition, there was an increase in inventories, which suggests that local demand isn’t enough to trigger a drop in stockpiles in the coming months.

And let’s not forget that joblessness is still extremely high in the euro zone, with youth unemployment above 50% in some member nations. With that, consumers are left with limited spending power, as they also have to deal with higher tax rates that are part of their government’s austerity measures.

These underlying weaknesses probably reminded traders that the euro zone has a long way to go before staging an actual recovery, and this can help explain why the euro quickly gave up its recent gains to the dollar.

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Still, the PMI figures were able to bring a sigh of relief for the region. After all, the reports signal growth opportunities in the euro zone, despite the headwinds brought about by austerity programs and unemployment. For now, it appears that the ECB could take the upbeat PMI data as a sign that the euro zone doesn’t need additional stimulus in the near term.