EMU economic outlook steadies at the beginning of 2019

One of the longest phases of weakening seen in recent years seems to have now come to an end. After the minor increase at the beginning of the year, in February 2019 the DZ BANK Euro-Indikator – a leading indicator for the EMU economic cycle – remained lodged at the level of 99.1 points it had achieved. In the month just closed, there was a slight improvement on the prior-year rate – for the first time in more than a year. It rose from -2.4 percent in December and January to -2.3 percent in February.

In February, the trend for the individual Euro-Indikator components was once more far from even. There was little of a positive nature to report from industry again. Manufacturing is suffering especially from the weakening in world trade and the geopolitical risks. In the past month, according to the European Commission production expectations fell further. They are now only just above the long-term average. The latest survey of EMU purchasing managers in industry suggested that in February the sector actually saw a slight loss of business for the first time since June 2013. The IHS Markit Eurozone PMI fell 1.2 points on January to 49.3 points, thus ending a growth phase that lasted over five and a half years.

Consumer sentiment is now starting to gradually brighten. The Euroland consumer confidence index that the European Commission computes each month edged back up in January and February after having dropped for about a year. Private households continue to rate their income prospects for the coming 12 months as very good. And the expectations as regards general economic developments and labour market opportunities have improved of late again. This points to at least a stable outlook for private consumer spending.

The stock market has also achieved an impressive turnaround since the beginning of the year. In the course of 2018 the MSCI stock index for Euroland shed more than 15 percent, but in 2019 prices have notably recovered. In February, prices were on average actually more than four percent up on the prior month.

As regards interest rates, the signals continued by contrast to tend to be negative. In February, yields on long Bunds fell to the lowest level in more than two years, further reducing the differential to money market rates. This is considered a negative economic signal when calculating the Euro-Indikator.

All in all, there are increasing signs that the Euroland economy may now be able to steady itself after about one and a half years in decline. Positive momentum in the industrial sector will be necessary in the coming months, however, if there is to be a real turnaround.

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