EMU economy still unable to find a foothold

The outlook for the economy in the euro zone deteriorated further in July. This is shown by DZ BANK’s euro indicator, which fell by 0.3 percent in the past month. The leading indicator for economic development is now at 98.4 points, the lowest level for around three years. The annual rate of change also declined slightly in July, falling from -1.8 to
-1.9 percent.

As in previous months, the industrial sector was particularly weak. Incoming orders declined and companies further reduced their production expectations for the coming months. The purchasing managers surveyed by IHS Markit were also more pessimistic. In July, the purchasing managers‘ index for the euro zone fell to its lowest level since December 2012. According to the respondents, the ongoing trade conflicts, the crisis in the automotive industry and political uncertainty damaged domestic and export demand.

Meanwhile, the financial markets showed a mixed picture last month. While expectations of a further easing of monetary policy drove up prices on the stock markets – the MSCI index for the euro zone rose by an average of more than three percent per month – falling yields on long-term government bonds led to a further flattening of the yield curve. The difference between money market interest rates (3-month Euribor) and the yield on German government bonds with a 10-year residual maturity has melted to zero. This was last the case in December 2008, during the „big recession“.

Nevertheless, fears of a recession do not seem to plague European consumers at present. At any rate, the EU Commission’s monthly measure of consumer confidence rose somewhat surprisingly slightly in July. The expectations of private households with regard to the general economic development have improved slightly compared to the previous month, and their own financial situation continues to be assessed as positive. The propensity to make major purchases has even risen to its highest level in eight months.

Overall, the euro indicator does not point to an economic turnaround in the next one to two quarters, and there are no signs of stronger growth. Should the downturn in the industrial sector continue, a recession in the economy as a whole would also appear possible. At present, however, the stable labor market and robust consumer demand in particular are ensuring that the negative impetus from the manufacturing sector can be compensated for and that gross domestic product can continue to grow, albeit at very low growth rates.

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