The economic outlook for the Eurozone is brightening, but there is no reason for complacency. The recovery is helped by record low interest rates thanks to ECB QE, a weak euro and cheap oil. None of these should be taken for granted.
Large gap between US and Eurozone economic surprises
Source: Thomson Reuters Datastream, ING IM (01/01/2013 – 27/03/2015)
Eurozone corporate activity keeps expanding
The economic outlook for the Eurozone is clearly brightening. After a decent GDP growth figure of 0.3% in the last quarter of 2014, the first quarter of this year started on a positive footing with many better-than-expected macroeconomic indicators – also in the past week.
The Eurozone Composite Purchasing Managers Index (PMI) saw another rise in March, to 54.1 from 53.3 in February. The services sector continues to lead the way. With the help of a weaker euro and cheap energy, Eurozone manufacturers are also increasingly contributing to growth. German manufacturers are first in line to benefit from the weaker euro. The German manufacturing PMI posted the best reading in eight months. This was also reflected in Germany's most prominent leading indicator, the IFO index, which increased for the fifth month in a row to 107.9 in March.
Lower oil and weaker euro key contributors to growth
The growth story seems to be much the same in most of the Eurozone countries. Lower oil prices have given households increasing purchasing power, while at the same time the labour market is gradually improving. This should be a favourable backdrop for household spending this year. On top of that, the ECB’s quantitative easing (QE) program has not only weakened the euro, giving a boost to exports, but also revived stock markets and asset prices in general. As such, house prices have now also started to creep higher, which in combination with low interest rates, could be the driving force for a pick-up in construction activity.
No reason for complacency
The Eurozone PMI index is consistent with a GDP growth rate of 0.4% for the first quarter of this year while a modest acceleration in the reminder of the year is likely. There is no reason for complacency though. The recovery is being helped by record low interest rates thanks to the ECB’s QE, a weakened euro and cheap oil. None of these can or should be taken for granted. Moreover, PMI details show the uneven nature of the recovery, with French manufacturing especially lagging behind. With the ECB already stimulating at full throttle, there is still work to do in several European capitals to strengthen the euro area's growth potential.
Moreover, the difficult negotiations with the new Greek government show that a “Grexit” cannot be ruled out. A heightening of Greek turmoil can have a negative impact on markets and risk appetite in general and impede the sustainability of the current upturn.