07 Mar 2018
It looks like 2018 is off to a solid start in the Eurozone. After the strong industrial production print for December 2017, growing 5.2% year-on-year, PMI data this week continued to register high levels of growth in the manufacturing sector.
Last week, this column highlighted that while some corporate survey data has decelerated, the level itself remains high. Final PMI data for February tells a similar story, coming in a shade higher than the preliminary reading, at 58.6, which makes Q1 2018 so far the second highest quarter average growth reported in 18 years – second only to last quarter. Drilling down, output prices continue to rise while skills shortages were reported, which may signal some capacity constraints and inflationary pressures coming through. Conversely, forward-looking signals such as weaker new orders may reflect the pressure from euro strength; this warrants watching in the coming months. On the country level, all reporting euro area countries registered positive growth PMIs (see Chart 6), with the Netherlands registering a Eurozone-high for the month and national record-high of 63.4, followed by Germany at 60.6. Greek PMI takes the prize for most improved, reporting a 212-month high of 56.1 – above Spain at 56 and France. The French figure came in at a six-month low of 55.9.
More broadly, the European Commission’s economic sentiment indicator also declined slightly in February, from 114.9 to 114.1. Consumer sentiment decelerated but remains marginally net positive at 0.1; this is far above the net negative long-term average for the series. The decline reflects underlying weakness in the expected financial situation of households, as well as the broader economic environment. However, this data can be volatile and would need to decline significantly and consistently from here to suggest a truly malign trend. We will watch these data as with the corporate counterparts for signs that downside risks are materialising through H1, but we do not yet see cause for alarm. In terms of hard data releases, the unemployment rate for January brought some good cheer, registering 8.6% unemployment rate; the lowest rate for the currency union since December 2008 and a full one percentage point lower than January 2017. The improvement in the labour market reflects the broad-based economic recovery, particularly last year, but levels remain uneven across member states (see Chart 7).
Italy stands out in this respect, as the unemployment rate actually increased in January to 11.1%. While the recovery has benefited the Italian economy, the Italian parliamentary election, which took place last weekend, reflects ongoing economic and political dissatisfaction in a country in need of reform. The vote failed to produce an absolute majority for any party or pre-formed alliance so uncertainty remains high as to who will lead the Italian government. Looking across domestic and foreign policy, there is no combination of parties that would easily form a durable coalition to enact these much-needed structural reforms. Two things are clear though: first, that no party is explicitly seeking to take Italy out of the Eurozone, so overt Italexit risk is low; second, if and when a government is formed, the ruling coalition is very likely to be combative with the EU on fiscal rules, integration and risk sharing, while unlikely to take action on constructive domestic reforms.
Stephanie Kelly is Political Economist at Standard Life Investments
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