Eurozone: All that glitters isn’t gold

James McCann, European economist at Standard Life Investments discusses the outlook for the eurozone.

The most recent survey data coming out of the eurozone has been unmistakably upbeat. The flash estimates for the November Purchasing Managers’ Indices (PMI) improved for a second consecutive month, to a new cyclical high of 54.4. Looking at the breakdown, the service sector continues to lead the way at an impressive 54.6 and, while manufacturing is more subdued at 52.8, this still suggests faster growth across the sector. These data suggest the strongest increase in private sector orders, employment and backlogs of work in more than four years. However, it is not just the PMI surveys that are pointing to better activity nrates. The European mCommission’s eurozone Economic Sentiment survey is also at a four year high, while the German IFO report mshowed a rebound in current conditions and improved expectations. The sentiment contained in survey data has fairly consistently surprised to the upside thus far over Q4.

What should we take from these signals? An upbeat assessment would be that the eurozone economy is starting to reaccelerate following a difficult summer. In this case, a stabilisation in international conditions following a painful recession in the traded goods sector is helping to support aggregate activity. Indeed, early indications suggest that Q3 GDP growth was dampened by a negative contribution from net trade.

Is the eurozone economy picking up speed again now that this drag is fading? There is a more cautious interpretation of these trends; survey data are not accurately capturing the momentum of underlying activity. There are a couple of precedents here. Over the first half of 2014, eurozone survey data were signalling a strengthening recovery. Official data released with a time lag contradicted this illusion, with the recovery stalling in Q2.

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