Eurozone recovery to continue at subdued pace

The weak industrial output data from the eurozone and its main economies is highlighting the sluggish nature of the economic recovery in the region.

The eurozone economy has grown at a very modest pace since emerging from an 18-month long recession back in the second quarter of 2013. GDP grew by just 0.2% in the first quarter of this year.

The breakdown of the first quarter GDP report shows very subdued growth in all the main components of demand-household spending, government, investment and exports. No sector of the economy is performing well.

Germany saw GDP rise by 0.8% in the quarter, with Spain up by 0.4%. GDP was flat in France and contracted in Italy, Netherlands, Finland and Portugal.

Survey data for the second quarter showed some signs of encouragement. The eurozone’s composite PMI, a good leading activity indicator, averaged 53.4 in the period, just above the first quarter average of 53.1. In terms of hard data for the second quarter, retail sales registered some improvement. They were up 0.6% on a three-month/ three-month basis in May.

However, at a national level, the key German Ifo index suggested that growth may have slowed in the eurozone’s largest economy in the second quarter, averaging 110.4 versus 110.9 in the opening quarter.

Recent survey data have seen some of the slowdown in countries like Germany and France, counterbalanced by improving trends in peripheral economies (such as Spain and Italy). Overall, the data suggests there might have been a slight pick-up in growth to 0.3-0.4% in the second quarter.

Meanwhile, monetary aggregates remain very weak. Growth in M3 money supply was at just 1.0% year-on-year in May, not far above April’s 3½ year low. Even more worrying, loans to the private sector have remained in decline, falling by 2% year-on-year in May. This continued deleveraging, especially in the corporate sector, is a major headwind for economic recovery.

Another cause for concern is the labour market. The unemployment rate has been falling very slowly. It stood at 11.6% in May, compared to a rate of 12% one year previously.

However, the employment component of the composite PMI has been encouraging recently, indicating the potential for some growth in employment.

On the monetary policy front, in a bid to counteract very low inflation, currently at 0.5%, and weak economic growth, the ECB introduced new policy easing measures at its June meeting. These included cutting its main interest rates to record low levels, with the key refi rate reduced from 0.25% to 0.15% and moving the deposit rate into negative territory.

The ECB also announced a number of non-standard policy measures including targeted longer-term refi operations. At the same time, the ECB has stated that it would consider further policy easing, including asset purchases (such as quantitative easing), “should it become necessary to further address risk of too prolonged a period of low inflation”

Overall, despite signs that the eurozone economy might have gained some momentum in the second quarter, the recovery remains weak and uneven.

The ongoing deleveraging by the private sector, tight fiscal policy, restrictive credit conditions and high unemployment, are likely to continue to act as restraints on the pace of growth.

Thus, the recovery is expected to continue at a subdued pace. GDP growth is likely to be little more than 1% in 2014 and may pick up to around 1.5% in 2015. In these circumstances, unemployment will remain very high with inflation staying very low.

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