Slowing growth, weak retail sales, declining industrial production. No, it’s not the UK, but the Eurozone, which, until recently was the darling of the global economy. Certainly, the region was unlikely to keep up the giddy pace seen in 2017, but few were expecting it to be quite so weak. What has gone wrong?
- GDP figures across the Eurozone have been below expectations, hit by the high Euro and bad weather
- Fund managers remain sanguine about the weakness, saying Eurozone companies continue to deliver
- However, structural weakness in the Eurozone economy may start to emerge
GDP figures for the first quarter were significantly behind expectations, slowing to its weakest growth rate for 18 months. The Eurozone economy grew up 0.4% in the first quarter, over the previous quarter, down from 0.6% growth in the fourth quarter. The consensus had been for 0.5% growth.
While this doesn’t look like a disaster, more troubling are the leading indicators. Manufacturing and services PMIs have been weak. Retail sales limped just 0.1% higher in March, compared to analyst expectations of 0.5%. Year on year, retail sales grew 0.8%, compared with 1.8% in February, and analyst expectations of 1.9%. Partly this is the same problems that have afflicted the UK economy – difficult weather conditions and unusually high rates of illness have kept people at home.
But is there more at work? Fund managers are relatively sanguine on the weakness. Alister Hibbert, Portfolio Manager within the European equities team at BlackRock said: “The European real GDP forecast of 2.3% may be a little optimistic, but as far as that is revised down by a few 10bps or so, we are not concerned and it will not lead to any changes in the structure of the fund. We are looking at businesses on their fundamentals and as long as those fundamentals remain undisturbed, we would not seek to change positioning. Certainly, the strongest part of the growth cycle is behind us, but we still think real GDP for Europe will be growing at robust levels, which is positive for markets.”
However, a persistent problem remains the higher Euro. The GDP data showed declining exports in France, suggesting this is acting as a drag on certain countries. At the same time, unemployment remains stubbornly high in countries such as France and Italy, and it is difficult to see that changing without structural change in the labour market. Macron may have the political clout, but the new Italian government is unlikely to be able to introduce significant reform.
In the ECB, the Eurozone still has a central bank committed to growth, but it has relatively little room to manoeuvre if growth lurches significantly lower. The Eurozone economy always has the power to surprise, but it is difficult to see it resuming its previous vigour.