The official sick man list of Europe has long been the PIIGS, or if you prefer, the GIPSI: Greece, Ireland, Spain, Italy, Portugal. As the Cyprus restructuring drama has moved into high gear, it’s obscured news of a serious deterioration in the French economy and the weakened condition of Slovenia, which has a population and GDP roughly 1.5 times as large as that of Cyprus.
MacroBusiness cited the terrible PMI report on France overnight, and quoted Markit’s chief economist Jack Kennedy:
The latest Flash PMI data spell further bad news for the French economy, with the downturn in output accelerating to the sharpest in four years. Again it’s difficult to find any crumbs of comfort among the data, with new orders and backlogs both declining at sharper rates and employment cuts continuing. Moreover, future expectations in the service sector slumped to the lowest level since the peak of the financial crisis in late-2008, underlining the extent of companies’ worries over a persistently bleak economic climate.
Quartz (hat tip Richard Smith) had a similar bad reaction to the Markit report:
To frame it in another horrifying perspective, the PMI of the euro zone’s second-largest economy was lower than that of Spain and Italy—and almost down to Greek levels (video), as Reuters’ Jamie McGeever explains.
What’s most worrying is when you look at how France’s data stacked up against the euro zone’s as a whole, which were also published today. While the euro zone’s PMI (blue line) and its GDP growth (orange line) have moved pretty closely in sync, France’s PMI has become unhinged in the last couple of years. And that’s bad because, as PMI reflects business confidence, it’s typically a leading indicator of GDP growth (click to enlarge):
….But even if PMI continues to fall, the chart above shows that France’s GDP has proven fairly resilient—especially compared with the euro zone’s trend. So things should be okay, right?
Probably not. Kennedy chalks this ”puzzling” gap in GDP and PMI up to the difficulty in accurately measuring service-sector output in the official data. The recent blindsiding slump in French industrial production may show official data finally falling back in line with PMI, he says.
That means that the gap you see in the above chart could be about to close. GDP growth for the first quarter of this year could come in surprisingly low. If so the country’s chances for a near-term recovery are receding faster than its leaders may be willing to admit.
And while the cognoscenti were wondering when austerity would hit the core, and expected France to take the hit, I doubt many investors have Slovenia on their watch list. But Reuters argues Slovenia will be next to ask for a rescue:
Slovenia’s mostly state-owned banks are nursing some 7 billion euros of bad loans, equal to about 20 percent of GDP, underpinning persistent speculation that the country might have to follow other vulnerable euro zone countries in seeking a bailout…
Commerzbank says “Slovenia is likely to seek a refuge under the bailout umbrella in the second half of this year”. According to Christoph Weil, senior economist at the German bank:
I think Slovenia will ask only for a banking bailout but I would expect the euro finance ministers would demand a full economic adjustment program and measures to consolidate the budget and to reform the economy, meaning it would end up being a full-blown bailout.
They will need to issue bonds in the primary market if they need to recapitalize their banking sector but recent history does not bode well for this, Weil said:
Since March 2011…Slovenia has not issued any more new bonds in euros. In October 2012, one dollar bond was issued -Slovenia’s first. Only one dollar bond in two years is a bad omen for Slovenia’s ability to tap into the capital market.
Slovenia at least does not have the messy issue of boatloads of foreign depositors. But Slovenia needs to issue bonds before June 6, which means its weak financial condition is likely to command more attention in the coming weeks. Stay tuned.