EU Economy: Weekly Commentary – 06 May, 2024
European Market Review
European bond yields fell without affecting the stock market. The EUR/USD exchange rate stayed near 1.0763, as Brent crude oil prices dropped due to increased US inventories and production.

European bond yields declined, yet this trend failed to sway the stock market, which also experienced a downturn. The EUR/USD exchange rate hovered around 1.0763. Meanwhile, Brent crude oil prices plummeted, driven by recent US data revealing a substantial surge in crude oil inventories and production.
Europe View Synopsis
Positive inflation and economic growth data in the Eurozone provide relief for the ECB, reducing the immediate need for aggressive rate cuts. Anticipated cuts aim to stimulate recovery amid varied manufacturing activity.

Encouraging inflation and economic growth figures in the Eurozone provide some relief for the ECB, lessening the immediate necessity for aggressive rate cuts. Q1 2024 saw the eurozone economy rebound with 0.3% growth, driven by stabilized energy supply and rising wages. While Southern European nations excelled, Germany and France experienced modest growth. Ongoing conflicts and subdued global demand temper market optimism. Anticipated interest rate cuts in June aim to further stimulate recovery, supported by stable inflation. Manufacturing activity varies across Eurozone countries, with persistent challenges in Germany and France.
Economic growth
The Eurozone emerges from stagnation with 0.3% growth, credited to stabilized energy prices and wage increases, particularly notable in Southern Europe. Despite global challenges, an optimistic outlook prevails.

The economy of the eurozone has emerged from a prolonged period of stagnation, showing a growth of 0.3% in the first quarter of 2024 following the onset of the energy crisis in late 2022. This recovery is credited to a stabilized energy supply, resulting in significant cost savings and reduced inflation. Concurrently, wage growth has picked up to offset the decrease in purchasing power, currently benefiting consumers and encouraging spending.

Southern European countries have once again outperformed their northern counterparts: Spain and Portugal recorded a growth of 0.7% for the quarter, while Italy's growth increased to 0.3%. Germany and France saw a modest quarter-on-quarter growth of 0.2%, indicating progress. Although the growth trend remains cautious, influenced by subdued global demand and lingering effects of the energy crisis, positive indicators like the European Commission's Economic Sentiment Indicator point to a brighter future.

It's also crucial to recognize that ongoing conflicts in Ukraine, Russia, and the Middle East persist, posing potential repercussions on commodity and energy prices. With unemployment at historically low levels and inflation under control, the eurozone is primed for a more robust growth trajectory for the year. We expect rate cuts in June, which could further bolster economic recovery in the latter part of the year.
Eurozone inflation held steady in April, marking the seventh month below 3%. Core inflation moderated, prompting expectations of ECB interest rate cuts in June to prevent an economic slowdown.

Eurozone inflation held steady at 2.4% in April, marking the seventh consecutive month below 3%. Notably, inflation slowed in non-energy industrial goods and services, while prices for food, alcohol, and tobacco increased. Energy prices also declined at a slower rate. Despite a slight rebound in December attributed to energy prices, the headline rate remained consistent. Core inflation, excluding energy, food, alcohol, and tobacco, decreased to 2.7% from 2.9% in March, reflecting a continued moderation in energy prices. Notably, services inflation cooled to 3.7% from 4%, a significant development for the ECB.

Market expectations are mounting for the ECB to initiate interest rate cuts at its next monetary policy meeting in June. Several ECB members anticipate an interest rate reduction in June to prevent an excessive slowdown in the eurozone economy, citing risks from oil prices and Middle East volatility.

We expect that inflation will begin to decelerate at a slower pace in the coming months. While the current rapid decline can be attributed to base effects, as inflation approaches the target, the rate of decrease is expected to moderate. Nevertheless, we foresee rate cuts in June aligning with market expectations.
Manufacturing industry
Eurozone manufacturing PMI fell to 45.7 in April, below expectations but above the flash estimate. While France and Italy underperformed, Spain expanded. Input costs declined, indicating lower inflationary pressures.

The decline in manufacturing activities across the Eurozone in April was compounded by falling demand, leading to another round of price decreases in factories and subsequent employment reductions. According to the latest Eurozone manufacturing PMI dropped to 45.7 in April, extending the contraction for the 22nd consecutive month.

Europe's regional performance varied significantly, with countries like France and Italy underperforming while Spain expanded at its fastest rate in nearly two years. However, Italy experienced a retreat in manufacturing activity, with both output and new orders declining once again. France also witnessed a slip in its headline PMI as production and demand faltered, while Germany's PMI approached the breakeven point, albeit with an accelerated decline in purchases. In contrast, Spain had an exceptional month in April, supported by robust economic growth reported earlier in the week.

Manufacturing input costs in the eurozone continued to fall in April, albeit at a slower pace, marking the softest decline since March 2023. Prices charged also saw a reduction for the twelfth consecutive month. This indicates that inflationary pressures are increasingly lower and may indicate signs of improvements in the sector.

We anticipate improvement in the second half of the year, driven by rate cuts expected in June. However, due to the weakness in Germany or France, we do not expect a strong recovery until next year.
German retail sales
German retail sales beat expectations with a 1.8% MoM increase. Import prices rose 3.6% YoY, while export prices fell 1% YoY but slightly increased by 0.1% MoM.

German retail sales exceeded expectations, marking a 1.8% MoM increase. Import prices surged by 3.6% YoY, with a 0.4% rise from February, while export prices saw a 1% YoY decline but a slight 0.1% MoM uptick. These trends indicate a gradual economic recovery. Despite this positive development, first-quarter retail sales remained below the already weak fourth-quarter levels. Expectations of a slight GDP increase in Q1 hinge on the industry and construction sectors' performance, supported in part by favourable winter conditions.

We anticipate subdued growth, hovering near 0%, until the final quarter of the year due to high rates, lower demand and structural issues in the economy.
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