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Europa: two contrasting economic stories

17 June 2014, NBU


by Hans-Peter van Wersch, Senior Portfolio Manager, Wealtheon Group

Recently, the ECB started taking action against the worsening economic outlook and persistently low inflation. To get lending underway, it lowered its headline interest rate from 0.25% to 0.15%, set up a credit facility of EUR 400 billion and gave banks a negative interest rate if they store money with the ECB.

However, the story of the eurozone is hard to sum up in a single snapshot. There are significant differences in the economic development of the various Member States. The country causing the most concern is France, the ‘sick man of Europe’, whose economy has begun to contract again. By contrast, Germany is once again showing strong growth.

A reliable indicator of future growth in GDP is the Purchasing Managers Index. In the eurozone, the PMI is based on a survey of 3,000 purchasing managers in eight euro countries: Germany, France, Spain, Italy, Ireland, Greece, Austria and the Netherlands. The PMI figure is one of the most important monthly economic numbers and is interesting to watch, not only for the combined figure across the whole of the eurozone, but also for the individual countries.

Germany reported a PMI figure for May of 55.6. The German services sector even jumped as high as 56, which was the highest level for two years. By way of explanation, a figure above 50 indicates economic growth. It is also encouraging to point out that jobs growth in Germany is at its highest level since the end of 2011.

However, France reported unexpectedly that its economy could contract again. In May, the PMI index fell to a 3-month low of 49.3, which was considerably lower than the 50.5 expected by economists. This meant that France’s disappointing economic performance continued in May. Add to this the relatively high unemployment figure of 9.8% and the outlook remains worrying.

Although the picture in a few individual countries is disquieting, the overall outlook continues to be fairly encouraging for the time being. The eurozone saw its combined PMI output index decline slightly in May, from 54 to 53.5. However, this small reduction in the rate of growth in the eurozone does not detract from the fact that its overall PMI has seen continued growth for nearly two years. An increase in the growth of the number of new orders even suggests that the rate of economic growth may continue to rise over the coming months.

The most positive news from the economy’s viewpoint is that the eurozone PMI report indicates a broad-based rise in employment, both in the manufacturing and services sectors. It goes without saying that some countries will require structural reforms if they want to make a substantial impact on their persistently high rates of unemployment, but at least it is a good start.

However, the optimism we are suggesting is tempered somewhat for the time being by the fact that, historically speaking, consumer spending continues to be weak. This means that to a certain extent, business will be able to achieve a higher turnover by lowering prices. And, of course, this will make a contribution to what is the still very sluggish recovery of the European economy.

However, the ECB’s monetary easing is making it attractive for international investors to put their money in Europe. Especially since the United States has been on the road to tightening its monetary policy since the beginning of this year. Based on these developments, Wealtheon can also see the opportunity to expand its interests in the eurozone. However, this will be a gradual process, in line with economic developments.


Macroeconomics


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