EU Economy: Weekly Commentary – 04 March, 2024
Europe View Synopsis
Inflation is on the right track offset by weakening European economy with no signals of recovery. Focus (and key) is on Germany.

Mixed economic signals in Europe - France experiences a slowing disinflationary trend impacting consumption, while Germany faces challenges with a deepening manufacturing downturn, a spike in jobless claims, and declining retail sales. Despite some positive Eurozone economic sentiment, both the industrial and services sectors are facing challenges. Germany remains a cause for concern. ECB may cut rates sooner than the Fed due to economic weakness.
Inflation remains the correct path. Despite the Monthly uptick, which is normal, the overall trend is downwards. Services is a growing concern for ECB.

Inflation in Europe exhibited a modest increase. In February, there was a 2.6% rise, down from 2.8% in January, confirming the ongoing downward trajectory. Core inflation also showed a gentler increase, reaching 3.1%, compared to 3.3% in January. Persistent concerns surround services, which experienced a marginal decline of 0.1%, maintaining a YoY standing at 3.9%. Month on month, there is an upturn in inflation. It's essential to underscore that the reduction of inflation is not a linear process, and the final phase proves to be the most challenging, as previously mentioned.

In France, the consumer prices recorded a 2.9% YoY in February (vs.3.1% Jan). This was attributed to slower YoY rises in food prices (3.6% vs. 5.7% Jan), manufactured goods (0.3% vs. 0.7% in January), and services (3.1% vs. 3.2% Jan). Conversely, the conclusion of various support mechanisms resulted in a 10% surge in household electricity bills in February, causing energy inflation to rise again to 4.4%. In Italy, inflation remained unchanged.

The ECB expresses concern about service inflation and wage growth. We expect that services inflation to remain sticky at around the range of 2.5% - 3% and it should be offset by price reductions in other categories.
Consumer Sentiment
In February, economic sentiment in the Eurozone declined from 95.8 to 95.4, indicating continued stagnation, especially in the services sector. However, there is a silver lining as selling price expectations decreased, supporting the idea of potential rate cuts by the ECB.

Despite some positive signals in the February PMI, the European Commission Economic Sentiment Indicator presents a more pessimistic view. The industrial sector saw stable confidence, but challenges persist with weak production expectations and high inventories. The Services Confidence Indicator dropped, reflecting weakened demand and lower expectations, impacting the employment outlook. On a positive note, selling price expectations decreased for both goods and services, easing concerns about inflation. Overall, this dovish survey suggests limited economic rebound, paving the way for potential small ECB rate cuts from June onwards.

Looking at individual countries, in Germany, consumers are more optimistic in February. There is a positive willingness to buy, and economic expectations show minimal signs of improvement. The willingness to save reached its highest value since June 2008, recorded at 21.4 points. Despite ongoing inflation, cautious optimism prevails among consumers, as a further decline may boost confidence in the future. However, consumer uncertainty remains high due to continuously rising prices and pessimistic economic forecasts. The German government's reduction of the growth forecast for 2024 from an initial 1.3% to just 0.2% adds to prevailing pessimism, requiring Germany to patiently await an economic recovery. In France, consumer sentiment faced a downturn in February, influenced by households perceiving a slightly worse standard of living. Growing concerns about the expected financial situation were fuelled by heightened fears of unemployment. In Italy, consumer confidence continues to rise amid declining inflation, stable employment, and higher wages. However, the residential construction and retail sectors show weakening confidence, possibly linked to the phasing out of tax incentives. Manufacturing, particularly producers of investment goods, faces challenges with declining orders and rising inventories. The services sector took a breather, reflecting a dip in current business activity.
Germany continues to suffer
Germany faces economic headwinds as jobless claims spike, more than doubling expectations, and retail sales falter, reflecting a challenging landscape for both the labour market and consumer spending.

In February, Germany witnessed a notable setback in its labour market as jobless claims surged by 11k. This unexpected rise made the unemployment rate increase to 5.9% (5.8% Jan), the highest in over two years, challenging the previously resilient labour market, which had been a stabilizing factor for the German economy amid a fall in GDP. Government projections had already hinted at a diminishing momentum in the labour market, a trend expected to persist through the initial months of 2024, as reflected in the recorded decrease of 72k job offers compared to the previous year.

Germany grapples too with declining retail sales, which dropped by 0.4% in January, showing a slight improvement from the 1.6% decline in December. This decrease, amidst varied economic signals, including lower inflation and ongoing concerns about household spending power, underscores the challenges. The January figures highlight the difficulty of achieving a substantial rebound in private consumption, especially given the modest increase in real wage growth (0.1% in 2023 vs. 2022). With uncertainty lingering and higher interest rates prompting precautionary savings, the economic landscape remains intricate, as reflected in the February labour market data, which indicates a struggle with unemployment.
France economic growth
France has a light at the end of the tunnel and a free track to start recovery in the second half of the year.

The upward revision of economic growth is slight, showing a quarter-on-quarter increase of 0.1% (vs. initially reported 0%). Investment manifests weaker than anticipated, declining by 0.9% over the quarter. On a positive note, household consumption exhibited a slight improvement, maintaining stability over the quarter. The contribution of domestic demand remains unchanged, while the contribution of foreign trade is revised downwards, and inventories see a significant upward revision. Overall, France experienced stagnation at the close of 2023, confirming the situation in the third quarter of the same year.

These updated figures don't alter the outlook for 2024. The year has started with a notably low level of activity, a fact confirmed by the household consumption data for January. Despite increased confidence, there was a 0.3% decrease in the volume of household consumption of goods. This decline was primarily driven by reduced purchases of transport equipment by households (a 6.7% drop vs. a 4.8% increase Dec), particularly marked in the context of stricter environmental bonus and penalty schemes affecting car sales. However, all other categories of goods consumption experienced growth in January, a positive departure from previous months.

France is starting to show recovery signals. Its manufacturing sector is improving, inflation coming down and the economic growth was positive in the last quarter of 2023.
Manufacturing sector
Manufacturing sector remains in contraction. Germany will be the burden of economic growth for this year.

In February, the HCOB Eurozone Manufacturing PMI exhibited a MoM decline to 46.5, maintaining the second-slowest deterioration in manufacturing conditions since March 2023. Germany, the largest economy, faced its sharpest deterioration in four months, recording a PMI of 42.5, reaching a four-month low. Contrastingly, positive performances were observed in the periphery, with Spain's manufacturing sector returning to growth at 51.5, marking the first expansion in nearly a year.

The overall downturn in demand for euro-area goods showed signs of abating, with factory orders declining at the slowest pace since March of the previous year. Despite employment levels falling for a ninth consecutive month, manufacturers managed to clear orders pending completion. These mixed indicators reflect a mixed economic landscape in the eurozone manufacturing sector, with challenges in powerhouse economies like Germany and encouraging signs of growth and recovery in other nations, such as Spain or France.

Overall, although signs of improvement seem to be beginning to be seen, Germany remains a cause for concern. The decline in new orders, production and employment accelerated. The main power Europe continues to suffer and has no signs of improving soon.

Germany will be the burden of the EU in 2024. We believe that we will not see improvements until the end of the year when the cuts in interest rates begin to affect the economy.
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