Eurozone: Gaining strength

For years since the 2008 global financial crisis, the $13.6 trillion Eurozone economy has been synonymous with gloom and doom. No more! The 19-member euro-area has started 2016 with a string of upbeat economic data coming in recent weeks and days. While the fundamentals are hardly back to their pre-crisis level, it seems that the slow process of economic recovery may pick up pace this year.
Economic sentiment has been up lately. The European Commission’s (EC) Economic Sentiment Index (ESI) for Eurozone gained 0.7 points to reach its highest level (106.8) in nearly five years last December. This improvement was primarily on account of greater confidence in industrial activity. “Amongst the largest euro-area economies, the ESI rallied in Spain (3.4), increased slightly in Italy (+0.4) and remained (broadly) unchanged in Germany (+0.0) and France (-0.1),” the EC noted.
Manufacturing and services sectors are slowly gaining vigour. The composite purchasing manager index (PMI) – which is compiled by financial information research firm Markit that surveys about 5,000 Eurozone companies – reportedly showed an improved reading of 54.3 for December.
Unemployment is edging lower, as per Eurostat, which is the EU’s statistics body. After peaking at 12 percent in 2012, total unemployment in the Eurozone was down to 10.5 percent in November 2015. From nearly 25 percent in 2012, youth unemployment – a big worry – came down to 22 percent by November 2015. But there remain wide disparities between Western and Southern European job markets.
For instance, every fourth Greek and every fifth Spaniard is out of work, compared to every twentieth German who is looking for work, data show. Nearly half of below-25 working-age folks in Greece and Spain are unemployed. So there is scarce solace in the fact that unemployment marginally declined in these peripheral economies by the end of CY15.
This week marked another positive. Eurostat data showed that housing prices in the Eurozone had grown last year at their fastest pace since the financial crisis hit in 2008. House prices jumped in the Jun-Sep 2015 quarter by 2.3 percent year-on-year and by 1 percent quarter-on-quarter. Recoveries were the fastest in Austria and Germany, notable in Spain and Ireland, but non-existent in France and Italy.
The slight jump in housing prices may be seen as a welcome sign by the region’s monetary overlord, the European Central Bank (ECB). ECB has pledged to keep on pumping €60 billion a month until March 2017 to buy sovereign and municipal bonds from regional countries. But the ECB’s mild version of US quantitative easing (QE) has not yet been able to push up inflation to a comfortable level.
Eurostat’s harmonized index of consumer prices showed a reading of 0.2 percent for December 2015, which was better than 0.1 percent recorded in November, but not far up from the dangerous deflation territory. ECB is targeting an inflation rate of about 2 percent by September this year. But apparently, businesses in foods, industrial and services sectors are not interested in raising prices.
Visible decline in energy prices has thrown spanners in ECB’s ultra-loose monetary posture. And such mild inflation numbers may lurk around for longer given the seemingly bottomless oil prices. But shouldn’t folks be spending more given that they are saving on their energy bills? However, given that non-energy inflation was up by only 0.9 percent month-on-month in December, it seems that more money in the pocket hasn’t yet turned into more consumption.
But on balance, things are looking up for the currency block. Now, as per the IMF’s latest update on the World Economic Outlook released earlier this week, Eurozone output is expected to grow by 1.7 percent in CY16, which will be the highest growth rate since 2010. Among major euro-area economies, Spain is expected to grow the fastest (2.7%), followed by Germany (1.7%), France (1.3%), and Italy (1.3%).
But economic headwinds remain. Slowdown in China – with which the Eurozone conducts about €1 billion worth trade every day – is an anathema to the economic block. Reuters recently quoted a UBS report suggesting that China slowing by one percentage point would knock off 0.1 to 0.3 percentage points off of euro-area’s growth.
The ECB must also be watchful in case instead of helping, its QE ends up fuelling a speculative housing bubble. Then, as the IMF outlook pointed out, these are challenging times for Europe to tackle the “tide of refugees”. The multilateral lender has rightly urged an approach that is productive for European labour markets, is less fiscally-straining, and avoids social exclusion.