Eurozone recovery struggles to gain momentum

The eurozone economy has grown only very modestly since it emerged from recession in the second quarter of last year.

This was its second major recession in the past seven years.

The most recent GDP data show that the recovery in activity actually stalled in the second quarter of 2014.

This partly reflected one-off factors, but it was still a very poor performance to record no growth in the quarter. On a year-on-year basis, growth slowed to a meagre 0.7% in quarter two, from 0.9% in the previous quarter.

The weak pace of recovery means that the eurozone economy remains 2.4% below its peak output level reached at the start of 2008. This contrasts sharply with other major economies such as the US and UK, which have already surpassed their previous output peaks.

In terms of quarter three, survey data generally indicate that the economy has continued to struggle to gain any momentum. The key eurozone composite PMI averaged 52.9 in the quarter. This is below the average of 53.4 in quarter two, although it is still consistent with growth of 0.2-0.3%. However, it must be noted that the composite PMI has tended to overestimate economic growth in recent quarters.

Meanwhile, the European Commission sentiment indices also indicate that the eurozone has continued to struggle in recent months. The headline economic sentiment index averaged 100.9 in the third quarter, down from 102.2 in the second quarter.

Furthermore, recent national survey data indicate that activity in the eurozone’s big three economies remains weak. The influential German Ifo business climate survey has continued on a downward trend.

Meanwhile, the French INSEE and Italian ISTAT business measures also continued to weaken in the third quarter.

Non-survey data have been more encouraging. Eurozone retail sales rebounded strongly in August, rising by 1.2%, having fallen in July. Meanwhile, industrial production picked up in July, rising by 1%, after declining in May and June. There are doubts, though, about whether this increase can be sustained.

Meanwhile, monetary aggregates remain very weak. Growth in M3 money supply was just 2% year-on-year in August. Loans to the private sector remain in decline, falling by 1.5% in August, as the economy continues to deleverage. Turning to the labour market, there have been some signs of improvement.

Employment rose by 0.2% in quarter two after a rise of 0.1% in the first quarter. Survey data suggest that employment continued to rise in quarter three. Meanwhile the unemployment rate has fallen to 11.5% in recent months from a peak of 12% a year ago. However, this is still a very high rate. Overall, it would seem that the eurozone did manage to record some modest GDP growth in third quarter, helped by stronger retail spending. However, the recovery is still facing many headwinds.

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

There is also a marked reluctance in some key economies to implement structural reforms that would boost growth.

Overall, the recovery is expected to continue at a subdued pace and lag well behind elsewhere. GDP growth is forecast to be below 1% in 2014. We see downside risks to the ECB projections that growth could pick up to 1.6% next year.

Thus, the eurozone recovery could continue to disappoint expectations. It is no wonder then that markets expect interest rates to remain very low for the rest of the decade, while the euro continues to weaken.

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