If workers sneeze, does the Eurozone catch cold?
17 April 2018
Winter has arrived in the Eurozone. Following a slew of weak sentiment data, the hard data is proving pretty disappointing too with industrial production printing -0.8% in February, bringing the three-month moving average down to -0.5%. Similarly, retail sales rose only 0.1% in the same month which, given the weak December and January prints, brought the three-month moving average change down to -0.4%. This looks set to put downward pressure on GDP growth for Q1 – short of a fantastical rebound in the March data, or large revisions. We spoke recently about how we expected a moderation in sentiment and GDP growth in 2018, but the magnitude of this weakness is striking relative to expectations. However, before we start panicking that a winter of discontent is only beginning, seasonal factors appear to be partly to blame. While there is a broad moderation coming through, bad weather and a severe flu season are likely exacerbating it (see Chart 6). The key question from a forecasting point of view is how much of the seasonality will lead to a bounce back once workers return to work when their roads and sinuses have cleared? We think April - or even March - should show a return to better activity data, resuming the solid growth story.
One reason to believe the Eurozone growth outlook remains favourable, in spite of the disappointing data, is the domestic demand story. The Eurozone consumer was instrumental in the return to form of the economy in recent years. Although this year we are forecasting an investment push from corporates in our GDP estimates, there are many reasons to believe that the consumer will continue to be an important driver of growth. Firstly, the environment remains very favourable for households. Unemployment rates continue their steady declines, printing the lowest rate in February (8.5%) since the end of 2008. At the same time, labour force participation has been rising, bringing even more people into employment in the region and supporting the demand impulse (see Chart 7). One issue that remains is the dispersion across labour markets; the German labour market looks to be the tightest, with an unemployment rate of 3.5%. Meanwhile Italy’s labour market recovery has been much slower; even in February’s print, Italian unemployment remained elevated relative to the average at 10.9%.
Underlying inflation remains restrained in the Eurozone with little sign of a rapid acceleration in the coming months. While this would seem to support household purchasing power, we need to keep in mind that much of this weakness stems from stubbornly weak wage growth across the currency union. A clearer boon for consumer spending is the improvement in credit conditions in the Eurozone in recent years; the latest bank lending survey highlighted that banks continue to expect demand to rise for consumer credit in the next three months. Interestingly, the savings rate in the Eurozone has actually risen through recent quarters in spite of last year being a stellar year for growth in the currency union and consumer confidence hitting an all-time high at the end of 2017. Drilling down though, the trend varies significantly by country, making it difficult to draw an overarching conclusion about why the rate has risen. As the cycle matures, there may be scope for households in parts of the Eurozone to lower their savings rates a little, although forecasting these trends is notoriously difficult.