EMU business cycle: bottom formation yes – recovery no

For about half a year now, the economy in the euro zone has more or less only been moving sideways: the downward trend that began at the beginning of 2018 has obviously come to an end. However, there are no signs of a radical recovery either.

This is illustrated by the latest development of DZ BANK’s euro indicator. Since June 2019, the indicator, which can indicate economic turning points at an early stage, has hardly moved at all. In January 2020, the indicator rose by 0.1 percent compared to the previous month, while in December there had been a corresponding decline. At the beginning of the year, the previous year’s rate remained almost unchanged at -0.5 percent.

It is at least encouraging that the situation in the shaken industrial sector is gradually stabilising. The sentiment indicators apparently bottomed out in the autumn of last year. According to IHS Markit’s Purchasing Managers‘ Index, the downturn in eurozone industry slowed in January. After all, the corresponding indicator rose to its highest value since last April. However, the index has been trading below the neutral 50 point mark for a year now, which means that it is still indicating a decline in business activity. A similar picture emerges from the production expectations of companies in the manufacturing sector, which are determined on behalf of the EU Commission. Although they have recently risen to their highest level since May 2019, they are still trading below their long-term average.

Nor is optimism spreading among consumers. On the contrary, private households are even more pessimistic about the general economic outlook for the next twelve months than they have been for more than six years. Nevertheless, consumers‘ willingness to spend has hardly suffered in recent months, presumably not least because job opportunities on the labor market are still considered relatively good.

The financial markets hardly provided any significant impulses for the calculation of the overall indicator in January, primarily because the clear ups and downs in share prices and bond yields are lost in the consideration of the monthly averages. Thus, stock prices – measured by the MSCI index for the euro zone – were slightly above their December average in January despite the strong movements in recent days. And also the yield on 10-year Bunds has hardly changed in January compared to last December when looking at the monthly averages. In this respect, the recent nervousness on the financial markets has hardly made itself felt in the Euro-Indicator.

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