Cold Snap and High Oil Prices Will Accelerate European Slow Down

Beware of economic data and surveys from Europe. Any backwards looking reports that are based on results prior to January 26 incorporate the boost to economic activity provided by the mild winter and stable oil prices up to that point. The cold snap and higher oil price will serve as a one-two punch that will lead to a dip in economic activity that will show up when reports on February results are released.

An example of using backward looking data to suggest that the European economic situation is muddling through is provided by EU Economic and Monetary Affairs Commissioner Olli Rehn who stated ""recent developments in survey data suggest that the expected slowdown will be rather mild and temporary" at a news conference the other day.

Europe is in danger of an economic slowdown that is much worse than just "mild and temporary". European December Industrial Output declined by 1.1%, led by a 2.7% drop by Germany, compared to November (which in turn was a 0.3% decline). The slide in industrial production most likely will show another big drop when February results are published.

The cold snap led to blocked transportation, reduced shopping and tourism, and higher energy costs. Just one  aspect of the cold snap, the freezing of the Danube, led to millions of dollars (actually Euros) in reduced economic activity. As shown in the map from NOAA, the temperatures in most of Europe were 4-6 degrees below normal for 30 day period from January 22 - February 20.

The European economy (as well as the U.S.) is being propped up by the $2 trillion liquidity injection in the past 4-6 months by global central banks, however, this massive money printing is starting to be reflected in higher prices for oil. Continued money printing (or if your prefer, quantitative easing) seems likely to lead to further increases in the price of oil. Combine the dangers of money printing with fact that the Greek debt deal is likely to unravel in the very near future, and it is challenging to come to any other conclusion than that the financial  markets are behaving with irrational exuberance. The recession in Europe is likely to be both severe and lengthy. At the very least, the results for February economic activity are likely to be depressed and come in lower than currently projected.


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