Robust growth in Q3 will soon give way in Europe. Markit reports Eurozone recovery slows as renewed contraction is evident outside of French-German core

Contracting periphery

Outside of the two largest euro member states, a renewed contraction of economic activity was evident in September. The Composite Output Index for the rest of the Eurozone1 has fallen steadily since peaking at 54.2 in March, dropping from 51.7 in August to 49.4 to thereby slip below the 50.0 no-change level for the first time since last November.

Employment growth disappoints

One of the more disappointing aspects of the recovery has been weak job creation. The Composite PMI Employment Index fell slightly in September, down from its weak post-recession peak in August, and is consistent with only very modest employment growth of perhaps 0.2% per quarter.

Furthermore, the jobs growth is largely confined to France and Germany. The former saw jobs created at a rate only just below August’s 28-month high, while the latter saw the sharpest rise in employment since May 2008. In contrast, outside of these countries, PMI data signalled an accelerating rate of job losses in September, with the rate of decline reaching the highest since February.

How long Germany and France can keep Europe from slipping back into recession remains to be seen, but if contraction of economic activity in the rest of Europe continues, I would suggest another quarter or two at most.

One big advantage German exporters had earlier in the year was the Euro collapsed to 1.18. The Euro is now approaching 1.35.

Meanwhile, Japan’s intervention in the Yen has failed to produce any lasting results, as expected.

Trade Friction Increases

Congress and Geithner are on the warpath over currencies already. Moreover, the House is set to vote on Tariff legislation this week, as discussed in Prepare for Currency/Trade Wars; How Might China Respond to US Tariffs?

Yet, without waiting to see whether or not the House and Senate pass a bill, China has fired off a preemptive warning. MarketWatch reports China raises antidumping duties on U.S. chicken

China’s Commerce Ministry has decided to increase an antidumping duty on U.S. chicken products, months after the punitive measures were first introduced, in a sign of continuing trade frictions between the two economic superpowers.

China will raise the minimum chicken duty to 50.3% on chicken products imported from the U.S., compared with minimum duties of 43.1% that were introduced in February, the ministry reportedly said in a statement on Sunday. The maximum antidumping tariff for the chicken products will remain at 105.4%, reports said.

Global Trade War Risks Increase

With US and China openly bickering, and with the US House of Representatives prepared to act, risk of a global trade war is increasing by the day. I do not think China’s chicken move will help any.

Every country wants its currency to weaken to stimulate exports. However, that’s mathematically impossible except against gold, and rising gold prices will not do exporters any good.

Hopefully cooler heads will prevail, but now that Geithner has stirred up a hornet’s nest, anything can happen.

Mike “Mish” Shedlock
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