|

The Eurozone is already slipping back into recession - UK Telegraph

The UK Telegraph's Matthew Flynn is out with an op-ed piece about the state of the Eurozone's current trajectory in light of recent economic indicators.

Key quotes (source: Matthew Flynn, UK Telegraph)

Retail sales are falling sharply. Industrial production is slumping. Construction is sluggish and the government is weak and clueless with little idea of how to respond to falling demand. That is... a description of what is meant to be the eurozone’s strongest economy – Germany. 

Very few people seem to have noticed it yet but there are worrying signs the exporting powerhouse at the centre of the eurozone is slowing down sharply. No progress has been made on reform, policy responses are limited and electorates are exhausted by austerity. One more downturn might be the last. 

Most mainstream economists have bought into the story that the eurozone is booming this year. Led by a powerful Germany, with France reviving under president Macron, and with a central bank that is still pumping the economy with printed money and near-zero interest rates, production has been rising and joblessness finally falling. Heck, even Italy and Greece have been growing again. Investors have been pouring cash into the continent, and the currency has been soaring, as anyone planning a holiday in France or Spain will quickly discover. 

There are some suspicious numbers emerging that don’t quite fit that narrative. Start with Germany. This week we learnt retail sales dropped by 0.7pc in February. They have fallen in six of the last eight months and all of the last three. On Friday, industrial production figures showed output down by 1.6pc, the largest monthly fall in three years. Factory orders came in way below expectations this week, with a mere 0.3pc rebound after the 3.5pc drop in January, and construction spending is also down. In fact, the only part of the German economy still expanding is its export industry, but even that is under threat. 

At the same time, Angela Merkel’s patched-together Grand Coalition seems unlikely to respond with any form of stimulus, while Germany will be the biggest loser from Donald Trump’s trade wars. 

 “We are not calling for a recession in Germany … yet”, argued High Frequency Economics in a note this week. “We are suggesting that the peak of economic growth for this cycle has been realised.” Once you are passed a peak, of course, then the only way is down. 

Across the eurozone as a whole, the outlook is not looking much better. Retail sales for the whole region rose a mere 0.1pc in February compared to the 0.5pc forecast. France is especially weak, with retail stagnant, and a nasty 1.9pc fall in household real income for January and for the year as a whole. A long summer of strikes is not going to help that economy, especially as its huge tourist industry needs the trains and planes running again to prosper. 

Over in Italy, there is at least some growth, which is a miracle given its experience of the single currency, but the jobs numbers came in below expectations this month. None of those figures fit the picture of an economy that is booming. In fact they look increasingly like one that is heading into a German-led downturn. 

In truth, the growth of the last two years has been mostly an illusion. The European Central Bank has chucked 2.2 trillion of freshly printed euros at the economy and slashed interest rates as close to zero as it can possibly get. It would be extraordinary if that amount of cash didn’t stimulate some kind of revival. But the key question was always this: would quantitative easing kick-start a genuine recovery, as it has in the United States, or to a more limited extent in the UK? Or would it, as it has in Japan for 20 years, merely generate a feeble revival that almost immediately runs out of steam? 

Without a strong Germany, the region can’t grow. It accounts for 23pc of the zone’s GDP and has created 38pc of the new jobs in Europe over the last five years. And Germany has stopped expanding. 

There have been no meaningful reforms to make the single currency work better. Indeed, in the background, the imbalances have grown even worse, with Germany’s shocking trade surplus draining demand from the rest of the continent. The ECB is out of policy responses. The banking system looks in worse shape than ever (suspiciously, Deutsche Bank’s shares keep hitting fresh lows – almost as if something was up in its home market). In the peripheral countries, voters are exhausted by austerity and low growth. In the core, Angela Merkel now looks too weak to impose a solution should a fresh crisis erupt. 

Author

Joshua Gibson

Joshua joins the FXStreet team as an Economics and Finance double major from Vancouver Island University with twelve years' experience as an independent trader focusing on technical analysis.

More from Joshua Gibson
Share:

Markets move fast. We move first.

Orange Juice Newsletter brings you expert driven insights - not headlines. Every day on your inbox.

By subscribing you agree to our Terms and conditions.

Editor's Picks

EUR/USD eases toward 1.1700 as USD finds fresh demand

EUR/USD eases toward the 1.1700 mark in Europe trading on Friday. The pair faces headwinds from a renewed uptick in the US Dollar as investors look past softer US inflation data. However, the EUR/USD downside appears capped by expectations of the Fed-ECB monetary policy divergence. 

GBP/USD steadies below 1.3400 as traders digest BoE policy update and US inflation data

The GBP/USD pair stalls the previous day's pullback from the vicinity of mid-1.3400s and a nearly two-month high, though it struggles to attract meaningful buyers during the Asian session on Friday. Spot prices currently trade around the 1.3380-1.3385 region, up only 0.05% for the day, amid mixed cues.

Gold stays weak below $4,350 as USD bulls shrug off softer US CPI

Gold holds the previous day's late pullback from the vicinity of the record high and stays in the red below $4,350 in the European session on Friday. The US CPI report released on Thursday pointed to cooling inflationary pressures, but the US Dollar seems resilient amid a fresh bout of short-covering.

Bitcoin, Ethereum and Ripple correction slide as BoJ rate decision weighs on sentiment

Bitcoin, Ethereum, and Ripple are extending their correction phases after losing nearly 3%, 8%, and 10%, respectively, through Friday. The pullback phase is further strengthened as the upcoming Bank of Japan’s rate decision on Friday weighs on risk sentiment, with BTC breaking key support, ETH deepening weekly losses, and XRP sliding to multi-month lows.

How much can one month of soft inflation change the Fed’s mind?

One month of softer inflation data is rarely enough to shift Federal Reserve policy on its own, but in a market highly sensitive to every data point, even a single reading can reshape expectations. November’s inflation report offered a welcome sign of cooling price pressures. 

Ethereum Price Forecast: EF outlines ways to solve growing state issues

Ethereum price today: $2,920. The EF noted that Ethereum's growing state could lead to centralization and weaken censorship resistance. The Stateless Consensus team outlined state expiry, state archive and partial statelessness as potential solutions to the growing state load.