Mixed views on recovery in eurozone from DNB and Nordea

Views from DNB Markets and Nordea Markets suggest any ongoing recovery in the eurozone is unevenly distributed among the currency union’s member states.

The latest eurozone sentiment indicators point to recovery in most parts of the economy, apart from construction, DNB Markets said.

“Households are now at their least pessimistic since August 2011, i.e. just before the debt crisis took a turn for the worse. The aggregated Economic Sentiment Index (ESI) rose 1.2 points to 92.5, slightly better than expected, but well in line with the previously reported increase in the PMI index for July.”

“This was the third consecutive month of gains and the ESI is now at its highest level since April 2012. If sentiment does not deteriorate in August and September, GDP should be about unchanged in the third quarter. If so, the hitherto longest downturn in the eurozone – with seven consecutive quarters of GDP decline – has come to an end. But that’s all there is. Furthermore, sentiment is stuck at low levels in most countries. Only in Germany is sentiment better than the average over the last 20 years. Mirroring this, GfK’s measure of consumer confidence, released yesterday, has reached its highest level since September 2007, fuelled by decent jobs and wage growth. The willingness to buy is rising, but has yet to translate into actual consumption.”

DNB’s analysts, citing Eurostat numbers, went on to state that this “sluggish mood” was affecting profit and investment ratios in the eurozone.

“Corporate earnings, as measured by gross operating profits, stood at nearly 38% of GDP in Q1. Profit ratios have declined along with the decline in GDP, but are still higher than during the Great Recession. In contrast, non-financial companies ‘investment ratio has fallen to its lowest level ever, in Q1 only accounting for 19% of these industries’ value added. The low level may be seen from two angles. The positive angle is that the low level reflects deferred renewal of production assets, thus representing a significant growth potential going forward. The negative is that low enterprise investments probably reflects a number of structural problems, such as excess capacity after the pre-crisis investment boom, major restructuring due to globalization and low-cost competition, weak growth prospects, and still difficult access to credit as many banks have troubled balances and need to deleverage.”

Picking up on the theme of uneven recovery, analysts at Nordea Markets identified the Netherlands as a particular challenge to investors, despite the ongoing improvement in the aggregate ESI figures.

“By country, Germany at 100.5 continues to have by far the highest confidence, when the small countries are excluded (of all countries, Malta triumphs with a reading of 106.3). The next biggest eurozone economies, i.e. France and Italy, lag below the average of the eurozone, though both countries saw a clear improvement in confidence. On a weaker note, confidence fell noticeably in the Netherlands, slightly in Portugal and in Greece for the second month in a row. Excluding the smaller countries, Dutch confidence actually beats only Portugal, illustrating the weak state of the Dutch economy.”

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