EU Economy: Weekly Commentary – February 05, 2024
Eurozone View Synopsis
Eurozone has averted a technical recession. Inflation has improved but still is soon to claim victory. The services have a sticky inflation and the manufacturing sector could see rebounds in the coming months. Germany continues to exhibit weakness and consumer spending decreased even during the Christmas season.

The European Central Bank must lower rates before the FED does if they do not want to cause a recession. Economic growth in the eurozone was 0 per cent, Germany ongoing woes are not only with the manufacturing sector but also with consumer spending, but inflation continues its downward trend. We continue to maintain the position that the cuts will occur in the second half of the year.
GDP Europe
A technical recession in the eurozone has been averted, yet the threat of an economic recession persists. Notably, Portugal, Spain, Belgium, Latvia, and Italy played pivotal roles in supporting the growth. In contrast, Germany (the industrial powerhouse of Europe) and Ireland faced challenges.

Germany remains a cause for concern with a Q4 contraction of -0.3 per cent. Global demand for goods has weakened, and its heavy industry is grappling with the impact of elevated energy prices. Furthermore, alongside these existing challenges escalating tensions, resurging inflation, and potential shipping delays means that Germany faces a difficult economic landscape. France managed to maintain a stable GDP (0.0 per cent), while Southern European economies spearheaded growth, preventing a technical recession. Spain, Portugal, and Italy posted growth rates of 0.6 per cent, 0.8 per cent, and 0.2 per cent respectively.

A widening spread in terms of economic weakness with the US underscores that the European Central Bank (ECB) to considering rate cuts ahead of the Federal Reserve. High inflation in the eurozone has affected consumption, the wage growth was sluggish and not above inflation. Real wages have consequently declined significantly. The energy crisis in the eurozone has further renewed energy competitiveness, resulting in pronounced differences in industrial performance.

Our perspective foresees stagflation in 2024, however, Europe could enter a recession in the upcoming quarters. The economy will be more damaged if the ECB does not cut rates soon. However, they don’t want to gamble with inflation.
Inflation commentary
The flash estimate reveals a slight decrease in eurozone inflation from 2.9 per cent to 2.8 per cent in January, with core inflation dropping to 3.3 per cent from 3.4 per cent in December. While these indicate initial moderation, caution is advised in claiming victory over inflation. Anticipating potential rebounds in the coming months, especially in the challenging final leg, external factors like ongoing tensions in the Middle East and disruptions in the Panama Canal add further pressure on inflation.

In January, inflation in the eurozone dipped to 2.8 per cent, down from 2.9 per cent in December, primarily driven by a 6.3 per cent year-over-year decrease in energy prices. Notably, food, alcohol, and tobacco saw a moderated increase of 5.7 per cent, compared to 6.1 per cent in December, signalling a decline in the inflation peak attributed to the Ukraine war. Core inflation also experienced a marginal drop from 3.4 per cent in December to 3.3 per cent, albeit falling below consensus expectations.

While the industry and retail sectors grapple with excess inventories, non-energy industrial goods price inflation has receded to 2 per cent. However, services inflation remains high at 4 per cent. Germany witnessed a significant decline in inflation in January, with consumer prices increasing by 2.9 per cent annually, down from 3.7 per cent in December.

Germany's inflation rate for January 2024 was 2.9 per cent, the lowest since June 2021 (2.4 per cent). The reduction in energy prices is evident, with a 2.8 per cent decrease from the same month the previous year due to changes in carbon pricing and the discontinuation of energy price deceleration measures. However, energy support measures in several member states, which kept prices lower last year, are gradually diminishing, so the prices could rebound. Food inflation is slowing but remains higher than the overall inflation rate.

The ECB closely monitors core inflation, emphasizing concerns over transport and goods prices, due to geopolitical tensions. The upward trend in selling price expectations, as seen in PMI and European Commission surveys, challenges the assumption of a continuous downtrend in core inflation.

While anticipating a gradual reduction in inflation, it is acknowledged that the process may face occasional rebounds and will not be linear. Services inflation is expected to remain dynamic in the near term, presenting challenges in achieving the desired reduction in the coming months. Our perspective remains unchanged; the inflation trend is decreasing overall.
German consumer sentiment
A weak Christmas season meant that German retail sales didn’t grow.

German retail sales experienced a significant hit, dropping by 1.6 per cent month-on-month in December, following a revised 0.8 per cent decline in the prior month. This downturn marks the second consecutive monthly decline, representing the most pronounced fall since October 2022. The unexpected decrease in these results was particularly surprising due to the Christmas season, indicating a drop in holiday sales.

Specifically, the food trade sector witnessed a substantial 2.8 per cent decline, while the non-food retail sector saw a 1.6 per cent dip in sales. On a year-on-year basis, retail trade exhibited a matching 1.6 per cent decrease. Looking at the full year, there was a more significant contraction of 3.3 per cent, accelerating from the 0.7 per cent contraction observed in 2022. This unexpected downturn showed the challenges faced by the retail sector, even amid expectations of heightened consumer activity during the festive period retail sales dropped.

Our outlook for Germany is pessimistic. The economy is immersed with a lot of problems and we expect a flat year, even if the tensions increase could decrease growth in more quarters.
Manufacturing comment
Manufacturing PMI rose, 2.2 per cent MoM to 46.6 in January 2024. New orders and output indices, both increased by over two points. Additionally, input costs and output chargers declined at a faster rate than in previous months. In general, manufacturing PMIs improved in the main economies in Europe.

The manufacturing Purchasing Managers' Index (PMI) for the eurozone stood at 46.6 last month, indicating a noticeable improvement from December's 44.4, albeit still residing in negative territory. This figure represents the highest level in the past ten months. The main economies such as Italy, Germany, and France improved although they continued contractionary territory.

Both factory production and new orders saw a decline at their slowest rate since April 2023. Eurozone factories persist in scaling back production, resulting in nearly seven consecutive months of job cuts within the sector. Notably, input costs and output prices experienced declines in January, even as delivery times lengthened for the first time in a year due to disruptions in the Red Sea. Simultaneously, business confidence reached a nine-month high at the beginning of the new year.

Anticipating a potential rebound in prices, we attribute this expectation to issues in the Panama Canal and the Red Sea, with the economic repercussions of such tensions typically manifesting with some delay.
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