Recent data suggests that the eurozone is gradually recovering, but highlights economic divergence, particularly with Germany lagging behind southern Europe.
listen to article
The latest Purchasing Managers Index data suggests that the weakness in the eurozone's beleaguered economies is easing, with stabilization in services activity offsetting a steep decline in manufacturing, particularly in Germany.
S&P Global's Eurozone composite PMI, which measures business activity across the eurozone, was 48.9 in February, up from 47.9 in January and the highest level in eight months.
However, this is the ninth consecutive time that the PMI reading has fallen below 50, the dividing line between contraction and expansion, indicating that the euro zone economy is still stuck in a rut after being stagnant for much of 2023.
Due to the lack of reliable, timely, and hard economic data in the euro area, many economists and analysts rely on monthly PMI or Economic Sentiment Index (ESI) numbers. Both of these survey-based indicators have a good track record of tracking year-over-year GDP growth. The latest PMI data suggests a modest recovery in growth since then in the euro area. This is in line with our macroeconomic team's forecast for a modest recovery by the end of the year.
Inequality in the euro area is higher in southern Europe than in northern Europe
Eurozone composite PMI data masks increasingly divergent trends across sectors and countries. Overall figures rebounded quite strongly in France in February, and are now well above 50 in Italy and Spain. However, in Germany it fell further (from 47.0 to 46.1) due to further weakness in manufacturing.
Our conclusion from February's PMI data is that, despite structural drag on manufacturing, the euro area is gradually recovering, mainly driven by a recovery in the services sector.
The ECB is likely to take the PMI release as a sign that monetary policy spillovers have peaked and growth will become stronger despite still-tight monetary policy. But while sentiment has clearly improved in recent months, most indicators still point to contraction.
Our macro team expects economic activity in the euro area to improve further, as the scars on European manufacturing from the energy shock are likely to reduce medium-term growth prospects for the euro area. , it is gradual.
Germany's economy remains in trouble
Last week, Germany's economy minister, Robert Habeck, announced that he had revised down his growth forecast for 2024 from 1.3% to 0.2%. On this basis, the economy effectively stalled. Habeck described Germany's economic situation as “dramatically bad.”
Germany was hit hard by Russia's invasion of Ukraine because its energy-intensive industries depended on Russian gas. Moreover, Germany's dependence on exports made it particularly vulnerable to the current downturn in global trade (and despite the relative weakness of the euro).
According to the Bundesbank, Germany may actually already be in recession. The economy shrank slightly last year, shrinking by 0.3% in the fourth quarter of 2023. Deutsche Bundesbank said in its latest monthly report that “stress factors” likely remain and economic output could therefore “slightly decline again in the first quarter of 2024.” . Two consecutive negative quarters would put Germany into a technological recession.
Improving the economic situation will likely require a period of stability and a vision for the future after a series of recent crises that have shaken Germany's economic model.
Currently lacking political leadership, Prime Minister Olaf Scholz's coalition partners – the Social Democrats, the Greens and the Liberals – have almost diametrically opposed views on economic policy. This could cause widespread confusion about where Germany is heading. The lack of a clear vision of what the economy should look like five to 10 years from now leads to a sense of uncertainty among businesses and households, and undermines the desire to invest in the future.
Looking to the future
The German Economic Advisory Council, which advises the government on economic issues, predicts the economy's potential growth rate to be just 0.4% per year over the next 10 years.
One of the main factors inhibiting production's potential growth rate is the shrinking workforce due to aging.
This long-term growth challenge also faces Italy, suggesting that the current positive performance of the Italian economy may be temporary.
difficult demographics
Italy's population is aging much faster than other European countries, with the population projected to decline by 2-5% over the next 20 years. In contrast to Germany, little policy has been taken to address the issue, and opposition to immigration remains strong in Italy.
In the short term, higher labor force participation rates may help offset the unfavorable demographic impact on Italy's labor supply, and in the long term artificial intelligence may help, but the final Demand growth has already taken a hit. As a result, potential growth rates are likely to remain significantly lower than in other regions.
Disclaimer
Please note that the article may contain technical language. Therefore, it may not be suitable for readers without professional investment experience. The views expressed herein are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may have different views and make different investment decisions for different clients. This document does not constitute investment advice. The value of an investment and the income it generates may go down as well as up and investors may not recover their initial expenditure. Past performance does not guarantee future returns. Investing in emerging markets, or specialized or restricted sectors, can lead to lower average may be exposed to higher volatility. In market conditions (social, political and economic conditions). Some emerging markets have less security than most international developed markets. Therefore, services that perform portfolio trading, clearing, and preservation on behalf of funds invested in emerging markets may involve greater risk.
