Euro Zone: Growth is sluggish

Market analysis - 4/4/2016

Consumer spending could slow in 2016 and 2017.

Data for January, February and March have suggested that the Euroland economy started the year with strong momentum. Given the trend in 2015, Q1 16 figures should have been well inside positive territory. Industrial production (see left-hand chart below), new car sales (see right-hand chart below) and the Zone's PMIs were all encouraging.

 Sadly, not all the indicators have been that rosy. Others, just as numerous and important, have contracted alarmingly in the first quarter. The Economic Sentiment Indicator (ESI), published by Eurostat, is down for the third consecutive time since the start of the year (see left hand-chart below). It is now at 103 points vs. 107 in December, far below the consensus of economists who foresaw a stabilisation in March. The manufacturing and services components of the ESI are still in expansion mode but confidence among purchasing managers in both sectors is eroding significantly, running counter to the PMIs mentioned earlier. With the sub-component relating to future demand in services falling, there is a strong likelihood this unfavourable trend will continue.


A geographic breakdown shows that the indicators are negatively influenced by Italy and France, while Germany and Spain are countering the movement (see right-hand chart below). German iindustrial production in February, to be reported on 6 April, could stoke concern. All the sub-indices, reflecting orders for which data are already known, are expected to be in negative territory.



Household consumption, one of the main engines of economic activity last year with investment, could slow down in 2016 and 2017. The decline in consumer confidence (see chart on front page) suggests that job creation is flagging. Moreover, in the coming quarters the gradual rebound in inflation will weaken growth in disposable income. To avoid these two scourges, Euro Zone consumers would have to tap more into their savings (see left-hand chart below) and use credit more systematically (see right-hand chart below). At present they are doing neither. This will probably be confirmed by a slight downturn in February retail sales, to be reported on 5 April.



From this perspective, the European Central Bank (ECB)'s recent decisions to lower its deposit rate further and increase its asset purchases marked a step in the right direction. Low yields on savings are designed to stimulate spending while encouraging lending is designed to stimulate demand.

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