Preliminary data suggest a robust acceleration in the Eurozone’s economy in the current quarter; however, the discrepancies in the pace of growth between member states and political risks might deepen the cracks in the bloc’s unity.
Kristian Rouz — According to the observations of IHS Markit, economic growth in the Eurozone is likely to have accelerated in February; it is nearing a six-year high. This suggests that the consequences of the global recession and early 2010s debt crisis are gradually fading. However, the boost in job creation, business sentiment and broader economic activity, as well as the uptick in overall growth, is driven by Germany, the EU’s industrial powerhouse. The country is capitalising on the European Central Bank’s (ECB) monetary stimulus and the weaker euro.
Meanwhile, the data for France and Italy might suggest less optimism as the rise of right-wing populism in both these nations is stirring politically-motivated anxiety among investors and business owners. The euro weakened on Tuesday despite the upbeat news, pointing at lingering investor scepticism regarding the Eurozone’s economic prospects.
In Germany, factory throughput demonstrated robustly positive dynamics in February, and both the production of goods and services gained momentum due to the solid labour market and loose credit environment, as well as Germany’s favourable position in international trade stemming from the weak euro. Consumer demand at home and abroad, both within the Eurozone and outside the bloc, are driving the German expansion.
IHS Markit’s composite Purchasing Managers’ Index (PMI) rose to 56.1 in February from 54.8 the previous month, the best in roughly three years. Compared to earlier projections that the metric would remain unchanged, this is an encouraging development for German business activity, which is likely to contribute to quicker growth in the entire Eurozone in 1Q17.
PMI readings above 50 reflect expansion, while readings below that are a sign of contraction.
“The latest PMI data are encouraging following the slightly weaker-than-expected preliminary estimate of GDP growth” for 4Q16, Trevor Balchin of IHS Markit in London said. “This figure was influenced by strong imports and could understate underlying momentum. The latest PMI adds to our expectations that economic growth will strengthen in the first quarter.”
The expansion in German manufacturing, Markit analysts observed, has been the most prominent since 2011, while the services sector “rose solidly”.
That said, the German GDP for the fourth quarter of the past year was a disappointment, at 0.4pc. However, the more recent optimism stems from declines in unemployment and an uptick in inflation, which is seen as driving consumer demand. For the private sector of the German economy, Markit said, business sentiment now stands at its record highest since 2012, when this type of data was first compiled.
In France, which is gradually becoming mired in political turbulence associated with the National Front’s right-wing populist, Eurosceptic and protectionist agenda, Markit saw surprise economic improvements, which also point to a brighter GDP outlook for the Eurozone.
However, political risks in France might offset the data optimism, The country’s first round of presidential elections will be held within two months, and National Front’s Marine Le Pen has a solid chance of winning.
“Everybody has learned lessons from last year’s big surprises. People probably don’t want to take big risks. The euro could face further pressure given there’s still time before the election,” Ayako Sera of Sumitomo Mitsui Trust Bank said.
The euro dropped to $1.0581 on Tuesday, extending losses to almost 2pc for this month. Investor demand for French bonds outpaced the demand for Deutsche Bund securities as greater risks in France have spurred the demand for safe haven assets there. In Germany, meanwhile, riskier assets have fared better amid the more encouraging data.
These reports further emphasise the growing internal differences within the Eurozone, and might turn out to be the seeds of further discord. With the Germans being increasingly frustrated with their role as the main driver of the Eurozone’s economy, the lack of policy flexibility within the bloc is a put-off for the nations that are less successful economically.