Fragile EMU economic cycle in spring 2019

After two weaker months in March and April, May in the Eurozone was not as bad as many had expected when measured in terms of key economic data. DZ BANK’s Euro-Indicator, which can function as a leading indicator for economic trends, edged up 0.1 percent and has now reached 99.0 points. The prior-year rate also improved slightly last month and is now at -1.8 percent as against -2.0 in April.

Above all, the suffering industrial sector has of late been a pleasant surprise. As regards both order receipts and companies’ output expectations after five months of a continual downturn, in May the news was more upbeat again. The output expectations recorded by the surveys made up the ground lost the prior month and are at present at least back at their long-term median. That said, the purchasing managers polled by Markit do not yet discern any improvement in the situation in manufacturing. The purchasing manager index dipped slightly in May and continues to be beneath the growth threshold of 50 points.

Among European consumers, sentiment brightened slightly in May, too. Consumer confidence as reported by the EU Commission survey has risen. Income expectations for the coming 12 months are actually now at their highest level in three and a half years. From the point of view of private households, the risk of becoming unemployed remains at a very low level.

The last few weeks did not go as well on the financial markets. Equity prices lost ground appreciably, falling on average for the month of May by almost three percent. Yields on long government bonds also eased further owing to the greater uncertainty. As a result, the gap to money market interest rates has dwindled even further, which constitutes a negative economic signal for the Euro-Indicator.

Overall, there continues to be a downward risk to the Eurozone economic cycle given the difficult political conditions. The forthcoming G20 summit in Japan could constitute a key milestone: Will the global economy slide further into protectionism, which would hit the export-trade-reliant Eurozone economies particularly hard, or will the trend be reversed after all? For the EMU economic outlook, 29 June will be an important date, too.

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