The world economy

The world economy

Powering down

More months of uncertainty about the euro area will weigh on the global economy

EUROPEAN leaders delivered rather more progress in tackling their interminable debt crisis than had been expected when they met in Brussels on June 28th and 29th. They decided, among other things, to allow the new permanent bail-out fund to recapitalise banks in ailing economies directly rather than via their governments. They also enabled rescue funds to buy the government bonds of struggling countries without imposing such strict conditions as before.

The euro promptly rose; stockmarkets regained some vim; the oil price spiked (see article). Government-bond yields fell in Spain and Italy; they also tumbled in Ireland on expectations that it will gain some retrospective relief from the heavy costs of its banking clear-up. In response, the Irish government decided to raise money by issuing short-term bills on July 5th, its first such auction since 2010.

But the June summit also delivered rather less than the market rally suggested. In theory, the agreement promises to break the self-reinforcing link between weak governments and weak banks. In practice, that will not happen until the European Central Bank (ECB) is put in charge of euro-area banking supervision, which may take a lot longer than the planned six months. Before then a deal stitched together in the bleary hours could well snag on legal difficulties about redefining the permanent fund’s remit without changing the treaty that set it up, or on political objections in smaller northern economies—Finland, for example, doesn’t like the idea of using the rescue funds to buy government bonds in secondary markets. Meanwhile, Greece has lost none of its capacity to cause trouble, as a new, weak government tries to extract concessions from creditor nations.
All of which means yet more uncertainty and yet more harm to the global economy. Within the euro area itself, the unemployment rate reached 11.1% in May, a record high on data going back to 1995 for the 17 countries now in the monetary union. The composite purchasing-managers’ index (PMI), which covers services as well as manufacturing, inched up in June but at 46.4 remained well below the 50 level that separates expansion from contraction. Even the redoubtable German economy now seems to be buckling. Its PMI composite index points to a small decline in national output in the second quarter, according to Markit, which assembles the indices. There is particular weakness in German manufacturing, which was contracting in June at its fastest rate in three years.

That industrial fragility has now spread around the world. In America the Institute for Supply Management’s manufacturing index fell in June to below 50, for the first time in almost three years (see chart). New orders plummeted, which suggests that the weakness will persist. One of the main reasons was a sharp decline in new export orders, with manufacturers blaming slacker demand in Europe and China. In its annual health-check of the American economy, the IMF this week said that recovery remained “tepid” and fretted about the fallout from an intensifying euro crisis.
In Asia, too, an industrial slowdown is under way. Japan’s PMI slipped below 50 in June for the first time since November. After falling in recent months, China’s official PMI is now only just above that threshold—although for China that probably means industrial production growing at an annualised pace of around 10% rather than its usual rate of 15%. Any slowdown still hurts economies, like Brazil, that have thrived by selling commodities to China. Brazil’s manufacturing sector contracted for the third successive month in June.
If markets remained relatively buoyant early this week, that was doubtless because they were waiting for central banks to step into the breach yet again. On July 5th, after The Economist had gone to press, both the ECB and the Bank of England were expected to ease monetary policy. Britain’s central bank had already signposted another dose of quantitative easing. For its part the ECB seemed likely to lower its main policy rate below 1% for the first time, probably to 0.75%. Passing that milestone would show how much more needs to be done to end the crisis.