EU Economy: Weekly Commentary – January 15, 2024
Eurozone View Synopsis
The ECB is between a rock and a hard place facing an inflation vs recession dilemma. By not cutting rates, the economy will continue to suffer and may lead to a recession but if they cut too soon inflation may spark higher.

Europe faces an uptick in inflation. The economic struggles persist, with Germany experiencing challenges not only in its industrial sector but also in consumer spending. Despite the overall economic weakness, the surge in inflationary pressures is prompting the European Central Bank (ECB) to approach potential rate cuts with caution, as they seek to avoid fast decisions that might lead to regrets. Consequently, the market may not see rate cuts happen as soon as it expects.
Industrial sector commentary.
Industrial production in Europe's main power is falling. The German economy is struggling whilst Italy woes continues. With interest rates remaining high and energy prices still elevated, a short-term recovery seems unlikely.

In November, orders with German factories exhibited a modest uptick of 0.3 per cent, falling significantly short of the anticipated 1.1 per cent increase forecast by analysts. This slight recovery comes on the heels of a substantial 3.8 per cent downturn in October, which was largely attributed to a drop in orders. The poor performance underscores the persistent industrial challenges confronting Germany, mainly driven by the ongoing energy crisis and a dip in global demand.

Contrastingly, France experienced a positive turn in its industrial production, registering a 0.5% growth in November. This marked the end of a three-month decline, surpassing economists' predictions that it would maintain the same level as October. The growth was propelled by a surge in the energy sector and the continuous expansion of manufacturing, which recorded a 0.3 per cent uptick in output. However, the situation in Germany and Italy is less promising, with both countries witnessing a decline in industrial production throughout November, leading to job losses in their respective industrial sectors. Specifically, Germany reported its sixth consecutive monthly decline, highlighting the persistent challenges faced by the Eurozone's largest economy due to elevated energy prices and enduring high interest rates.

Our outlook for this sector suggests that it will be the ballast in European growth. With interest rates remaining high and energy prices still elevated, a short-term recovery seems unlikely. Moreover, unemployment is on the rise as diminished demand and low production levels translate to reduced workforce requirements in factories.
Labour market commentary.
The labour market is resilient, and we note that unemployment rate decreased during November. The problems would come if the wages increase more despite a tight labour market.

In November 2023, the unemployment rate in the eurozone countries decreased by one-tenth compared to the previous month, reaching 6.4 per cent, marking a return to its historical minimum. The European Union as a whole also experienced a one-tenth decline in unemployment, settling at 5.9 per cent in the penultimate month of the previous year. This data reflects a robust labour market where employers face challenges in finding suitable staff, leading to an increase in salaries and, consequently, raising the risks of a second wave of inflation, which is very bad for the decision of the ECB to cut rates.

A concerning aspect is the unemployment rate among the young population (under 25), which stood at 14.5 per cent in both the EU and the eurozone in November. Although it saw a three-tenths decrease compared to the previous month in both regions, the persistently high youth unemployment rate poses challenges. With an ageing population and elevated youth unemployment, governments may find themselves needing to borrow more to meet pension obligations.

Our outlook suggests that the labour market will remain relatively stable, with a bit of an increase in unemployment expected due to economic fragility, particularly in the manufacturing sector, and seasonal variations because up to summer the hiring decreases and the temporary workers after sales their contracts will end.
Consumer spending commentary.
Consumer spending was a bit mixed during November, but we can expect increases in December figures due to the Christmas season. Germany is struggling also with consumer spending.

In December 2023, France witnessed a year-on-year increase in consumer price inflation, reaching 3.7 per cent, up from the previous month's 3.5 per cent and marginally below the anticipated 3.8 per cent market expectations. This inflationary trend was primarily driven by elevated prices in the energy and services sectors. Unexpectedly, French consumer spending also saw an upturn in November, encourage by strong expenditures on automobiles, apparel, and household equipment, among others. The overall surge in spending amounted to a 0.7 per cent increase, defying economists' predictions of a 0.2 per cent contraction.

Contrastingly, retail trade volume in the euro area and the EU saw a decline of 0.3 per cent and 0.2 per cent, respectively, in November 2023 compared to October 2023. Among the member states, Germany faced the most significant monthly contraction, registering -2.5 per cent, while Italy demonstrated a 1.5 per cent improvement.

We observe not only a downturn in the German industrial sector but also a reduction in consumer spending, signalling a potential recession for the economy. Overall, we anticipate an improvement in the data for December 2023 and January 2024, driven by the festive Christmas season and subsequent "sales" month.
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