Eurozone: Leading indicators point towards a positive start into 1Q 2015

USA: Fed still patient

Eurozone – Leading indicators point towards a positive start into 1Q 2015

During the last couple of days first leading indicators for January for the Eurozone economy have been released. The survey data of main leading indicators such as Industry-PMI or the German ifo businessclimate index display for the first time in months a clear positive tendency. The flash estimate of the Industry-PMI for the Eurozone in January came in slightly above the average reading of 4Q 2014 and thus points towards rising industrial production for 1Q 2015. After a prolonged period of weakness French survey data delivered a quite significant positive pick-up in January (+2%) in comparison to average data in 4Q 2014. In Germany the ifo business-climate index delivered a rising value for the third consecutive time. The general expectations of businesses (indicating a further rise in business activity in the months ahead) climbed to the highest value since August last year. The poll data shows that companies expect that the declining Euro exchange-rate will give positive impulses to export growth. The positive impact of a weakening currency on exports will however only be short-term. Over mid- to long-term export growth can only be sustained by innovation combined with rising productivity and efficiency. In order assure this, structural reforms (especially labor market) are crucial. With regards to structural reforms, mainly France and Italy have room for improvement.

Apart from exports, investments are the second main pillar for an anticipated slight growth acceleration of the Eurozone economy in 2015 (+1.1% y/y). Especially in France and Italy declining investment activity has weighed on growth over the last couple of quarters. Currently, however, first leading indicators do also point towards a slight improvement of investment activity, because the gradually improving mood among businesses has also been reflected in the most recent lending survey from the ECB. In 4Q 2014, according to financial institutions, the demand for loans for fixed investments has increased substantially (see graph) for the first time since early 2012. In general the indicators confirm our expectations for slight growth in 1Q 2015. Next week the focus of markets will be on the publication of detailed data of PMIs for January (2nd Feb.) as well as industry production data for Germany in December.

FOMC meeting – committee is still patient

The Fed slightly enhanced the economic assessment by saying that economic activity has been expanding at a ‘solid pace’ (December: moderate pace). In particular, lower energy prices have boosted household purchasing power. On the labor market the committee now sees ‘strong’ (formerly: solid) job gains. Next week Friday, the labor market for January will be released. Nonfarm Payrolls are expected to rise by 230,000. Nonetheless, lower energy prices have contributed to a further drop in inflation. In the near term, a further decline in inflation is expected, but the committee expects inflation to rise gradually towards 2% over the medium term. The Fed also added to the statement that they will include ‘international developments’ in their future assessment. In our view, this might refer to other central banks’ decisions (e.g. the ECB measures and the resulting strengthening of the US dollar against the euro), but we will have to read the forthcoming January minutes to get a clearer interpretation. If the labor market comes in line next week, we will continue to expect the first rate hike in June.