European Economic Indicators Point to Protracted Slowdown

Economic indicators in Europe released Tuesday pointed to a continued slowdown in the continent as Italy slipped further into a recession. However, most of the data points are lagging indicators and European Central Bank President Mario Draghi is preparing to launch a new stimulus plan aimed at reviving the continent's struggling economy.

Italy had a bad day of economic reports Tuesday with industrial production and second quarter GDP pointing to a protracted and deep slowdown of the economy. Italian industrial production for July, used as a leading indicator for future GDP growth fell 1.4 percent month over month, much faster than economists' estimate for a 1 percent drop. Also, this data is much weaker than June's 1.0 percent gain in industrial production. This news was released just ahead of second quarter GDP data, which showed that GDP fell 0.7 percent in the quarter, or at a 2.5 percent annualized rate, much worse than the 0.6 percent and 2.3 percent rates expected by economists.

The weakness in Italy, Europe's third largest economy by nominal GDP in 2011, does not bode well for the single currency and the larger economic zone. The European slowdown has likely already hindered global trade, weighing on other major economies including China and the United States. The news, especially from Italy, shows that the global economy may have room to slow further. Yields of ultra-safe bonds would seem to confirm this with bonds in many European nations trading at or near record-low yields and U.S. Treasury yields trading just off of record low yields as well.

To add fuel to the fire, German factory orders also showed weakness in July. Factory orders fell 1.7 percent from June, missing estimates for a 1.0 percent drop. The large miss followed a gain of 0.7 percent in June and, following Italy, shows that two of Europe's three largest economies are now starting to slow. Should negative data be released in France over the next few weeks, it might add credence to the theory that weakness in the peripheral European nations, mainly Spain, is now spilling over into core, stronger nations. Should that be the case, the likelihood of fiscal stimulus being enacted to expand the pan-European economy may decrease and the potential for monetary stimulus aimed at growth may increase.

European equities seemed to ignore the negative news. Initially, shares traded lower in peripheral nations such as Italy and Spain and shares were essentially flat in Germany. The Spanish Ibex 35 since rose 1.41 percent to lead European indexes. Also, Italy's MIB Index rose 1.3 percent and Germany's DAX rose 0.53 percent. Peripheral bond yields also remained tepid on the news, staying near week-lows.