James McCann (pictured), UK / Europe economist at Standard Life Investments, comments on the Eurozone outlook following the latest, more cautious ECB forecast.
The Eurozone is an open economy with a trade-to-GDP ratio (exports + imports as a share of GDP) of 85% – well above that seen in the UK, Japan and the US . This high trade intensity makes the region more sensitive to the global trade cycle, which has weakened markedly. Indeed, international export volumes have fallen 3.1% in annualised terms over the first half of the year, even before the recent market volatility.
The weakness in global trade is largely a reflection of a slowdown across many emerging market economies. Eurozone exposure to these regions is not insignificant. Exports to China (including Hong-Kong to account for reexporting) amount to 8% of the total. When we add the rest of the BRIC economies this share doubles to 16%, while the exposure to other Eastern European economies such as Turkey (3.3%) is also relatively high.
Slowing activity rates in these economies provide headwinds for Eurozone exporters, partly negating the boost from a weaker euro. However, all is not lost. Developed markets account for a clear majority of Eurozone exports, with the UK and US alone taking around a quarter. Furthermore, integrated supply chains mean that the final demand for exports to emerging markets comes in part from the developed world. Overall, the European Central Bank (ECB) is likely to adjust, rather than slash, its export forecasts.
The good news is that the Eurozone recovery has been chugging along solidly, even in the wake of weak global trade. Indeed, domestic demand has driven the recent upturn, with the contribution from net trade broadly neutral. There was further evidence of strengthening cyclical momentum in Europe last week. Monetary data showed an encouraging acceleration in M3 growth to 5.3% year-on-year (y/y) in July, supported by increased lending flows to both non-financial corporations (0.9% y/y) and
households (1.9% y/y).