Commentary: Europe economy stirs

09 August 2013 09:26  [Source: ICB]

It has been a long time since this magazine ­published an upbeat assessment of the European economy. But recent weeks have seen a steady trickle of economic and employment data from many sources that seem to point to early signs of a long-awaited easing of the region's malaise.

In the UK - where a new Canadian Bank of England governor pledged to keep interest rates low for an ­extended period - lots of indicators point to an upturn in the country's fortunes. Retail figures for July were the best since 2006, while manufacturing output rose by 1.9% month to month, more than double analysts' ­expectations. The country's car industry raised forecasts for the year to 2.22m units, making it potentially the best performance since 2007. It was also the first month for more than two decades in which all sectors of British manufacturing expanded.

EU flag Rex Features

Rex Features

Positive signs fuel optimism for a European turnaround

Meanwhile, Germany, France and Spain all saw sales of new cars rise in July, with Germany achieving a 2% increase. The country is now enjoying lower rates of unemployment, rising wages and increasing consumer confidence.

Across the eurozone, business confidence is improving. Data released by research group Markit indicates that the region's composite purchasing managers' index (PMI) rating reached its highest level in almost two years in July. The composite PMI data - which includes manufacturing and service sector output and conditions - increased to 50.5 in July, from 48.7 the previous month. PMI figures of above 50.0 indicate expanding output levels. The UK figures were even more impressive, with the country's PMI leaping from 56.9 in June to 60.2 in July.

The picture across Europe for unemployment - ­although still dire - shows early signs of improving. The number of unemployed workers in the eurozone ­decreased in June. Although the fall was tiny - just 0.1% or 24,000 jobs - it was the first decline in more than two years. Spain and Italy both saw unemployment drop, with Spain's rate declining to 26.3%. However, youth unemployment remains astonishingly high in many countries - at 56% in Spain and 58.7% in Greece.

These signs of a turnaround, however welcome, must be seen in the wider historical context. The region has been mired in an economic slump since 2008 and is still a long way off recovering to pre-crisis levels. The later eurozone financial crisis helped to further reduce confidence and business activity.

The chemical industry in Europe has also suffered badly - hit by plummeting domestic demand and its reliance on expensive naphtha feedstocks. According to July figures from trade group Cefic, chemical production is still falling and is 2% below the peak reached in the third quarter of 2008.

Europe-based chemical companies will be praying for any improvement to their fortunes after a tough start to the year. Second-quarter financials showed no signs of any pick up in Europe and highlighted more weakness in emerging markets.

LANXESS' second-quarter 2013 net profit shrank to €9m ($12m) from €174m in the same period last year. LANXESS chairman Axel Heitmann said candidly: "The first half of 2013 does not meet our own high standards. Trading conditions for our businesses remain tough and the fragile sentiment in Europe is now evident in other markets that are important for us, such as China and Brazil." LANXESS said that continued weakness in demand in the automotive and tyre industries has affected its sales.

BASF maintained its earnings target for 2013, but ­expected it to be more difficult to achieve as it reported a 4.2% drop in second-quarter net profit. CEO Kurt Bock said: "We expect the development of the second half to be rather flat compared to the first half of 2013. The ­European economy is shrinking slightly; the Chinese growth engine is no longer running at full power; the United States is growing moderately. We are clearly feeling these effects..."

Chemical distribution is also under pressure. German Brenntag's second-quarter net profit declined by 15.1% year on year to €68.7m ($91.6m), despite a 2.2% ­increase in sales to €2.54bn, Operating earnings before interest, tax, depreciation and amortisation (EBITDA) declined by 8.3% to €169.1m. CEO Steven Holland said: "We do not see the promise of any significant ­improvement in the macroeconomic environment."

By: Will Beacham
+44 20 8652 3214

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