Down but not out

Throughout much of 2018, the headlines lambasted the Eurozone, depicting it as an area of economic weakness. This sentiment was felt by investors too who identified an array of country-specific issues and weakening fundamentals within the bloc.

The Eurozone, not to be mistaken for the European Union (EU), represents 19 of the 28 countries that constitute the EU, all of whom have adopted the Euro as their sole legal tender. Aside from this, the major difference between these two entities is that the European Central Bank (ECB), rather than country specific central banks, dictates the monetary policies of its 19 members. Of these members, the largest contributors to economic growth are Germany, France, Italy and Spain respectively.

Over the course of 2018 and early 2019, many of the Eurozone’s members suffered their own individual issues and the region’s major economies were no exception:

• Germany: Weak manufacturing output brought on primarily by a reduction in automobile exports to China
• France: Gilet Jaunes or Yellow Vest riots, declared an ‘economic catastrophe’ by France’s finance minister
• Italy: Technical recession, characterised by two consecutive periods of negative growth
• Spain: Weak retail sales due to high levels of inflation

Given these factors, it was little surprise that the majority of forecasters were sceptical of prospects for the Eurozone.

However, as we continue through 2019, it appears economists’ caution may have been misguided. The latest data stemming from the Eurozone suggest the economy picked up at the start of the year, with GDP accelerating to 0.4% (illustrated in Chart 1), beating analysts’ expectations and reversing the sharp slowdown experienced in the second half of 2018.

Eurozone GDP Growth

Source: Bloomberg, May 2019

While the four principal economies were key contributors of the Eurozone’s poor performance in 2018, they could well be the reason for its sudden resurgence too. Both Spain and France experienced increases in household consumption whilst Germany’s manufacturing sector saw improvement over the previous month. Moreover, Italy surprised economists, pulling away from recessionary territory with growth surpassing analysts’ expectations.

The outcome of these factors meant that three of Europe’s four major economies reported either an increase in their GDP growth or at least a continuation of growth from the quarter prior, as shown below. Germany’s figures have not yet been released.

France, Italy & Spain’s GDP Growth

Source: Bloomberg, May 2019

In addition to the increase in economic growth, the underlying fundamentals are also showing greater resilience. As shown in Chart 3 recent data from the labour market reported that the Eurozone’s unemployment rate reached 7.7% in March, from a peak of 12.1% in 2013. This figure represented the lowest reading in over a decade.

Eurozone Unemployment Rate

Source: Bloomberg, May 2019

Overall, these factors suggest that the Eurozone has moved away from its darker days and is reviving. However, the ECB aren’t getting carried away just yet, cautioning that, for now, with external uncertainties such as Brexit and trade disputes still lingering, more concrete signs of the nascent recovery are required if confidence in the region’s economy is to be restored.

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