EU Economy: Weekly Commentary – 08 April, 2024
European Market Review

Amidst a backdrop of surging European bond yields and a tumultuous week for stock markets, Brent oil has surged past the $90 per barrel mark. This rally is propelled by escalating geopolitical tensions and mounting constraints on the global oil supply.

European bond yields experienced a surge, influenced by the upward momentum of US 10-year bond yields, which breached the 4.35% threshold. European stock markets encountered a volatile week, witnessing major indices declining by over 1%. The EUR/USD exchange rate remains stable at 1.087. Moreover, Brent oil surged past $90 per barrel during the week, driven by escalating geopolitical tensions, supply constraints, and increased demand in major economies, sustaining its upward trajectory.
Europe View Synopsis
Inflation is moving steadily toward the target range. Germany continues to grapple with challenges in the manufacturing sector. The likelihood of a rate cut in June is increasing.

Eurozone inflation has declined to 2.4%, prompting speculation of further ECB rate cuts. Despite this, the labour market remains robust, with an unemployment rate of 6.5%. Germany's persistent inflation downturn signals broader disinflationary patterns. In the business sector, manufacturing has contracted, while services have expanded. Germany reported its lowest PMI in 5 months at 41.9, while Spain's manufacturing PMI remained in expansion territory. Services PMI surged to 51.5, indicating optimism for future business activity. Given the inflation trend and economic challenges faced by major economies, we anticipate rate cuts in the June meeting.
The recent decline in Eurozone inflation is indeed a positive development, but it's unlikely to prompt a rate cut in the upcoming April meeting.

March saw inflation in the eurozone come in lower than expected, at 2.4% (vs. 2.6% Feb). Core inflation also fell from 3.1% to 2.9%. This unexpected improvement increases the likelihood of ECB rate adjustments, but cuts in April are unlikely.

Despite concerns about elevated services inflation, which remains at 4% and is the stickiest part and complicated to reduce in this last mile, the current data suggests easing domestic inflation pressures, bolstered by supportive survey results. While the labour market remains robust, with unemployment at a historic low of 6.5%, wage growth has started to moderate, which was one of the concerns of the ECB.

All the eyes are on Germany. It is witnessing a continued decline in headline inflation for the fourth consecutive month, with March's figures dropping to 2.2% YoY (vs. 2.5% Feb). This downward trend, possibly indicating a broader disinflationary pattern influenced by factors like the European Central Bank's monetary policy tightening and weaker demand, is accompanied by lower-than-expected rises in leisure activities and hospitality prices despite Easter. It could be a relief for Germany and its manufacturing sector could offset part of the high rates with lower costs.

The ECB is likely to wait for additional information on wage growth in May before making any decisions, hence June is the timeframe for possible rate cuts. We anticipate that the German manufacturing sector will be at its lowest point of decline and is expected to remain so until the second half of the year, when it is projected to begin recovering.
Business activity
Manufacturing continued to contract, contrasting with the expansion seen in the services sector, which also saw improvements in employment. However, the persistent concern lies in wage growth surpassing inflation levels.

The Manufacturing PMI recorded a figure of 46.1 in March (vs. 46.5 Feb). Germany, traditionally regarded as the economic powerhouse of the Eurozone, reported a PMI of 41.9, highlighting its lowest level in the past five months and highlighting the challenges facing its manufacturing sector. France experienced a PMI of 46.2, indicating a further contraction. Noteworthy performances were observed in Greece and Spain, with manufacturing PMIs of 56.9 and 51.4 respectively. Spain's position in the expansionary zone distinguishes it from many other Eurozone economies currently experiencing downturns.

The recent data from the manufacturing sector is concerning, especially considering the ongoing challenges faced by Germany and France, the two largest players in this sector. This decline is largely attributed to elevated interest rates. The European Central Bank (ECB) is now confronted with a delicate balancing act as inflation continues to hover above the target range, while the economy displays signs of weakness. The ECB's primary focus appears to be on curbing inflation, which raises the risk of a potential recession in Europe.

Services PMI surged to 51.5, driven by various factors such as stabilized demand, efforts to reduce work backlogs, and sustained employment growth. Notably, optimism regarding future business activity peaked in February 2022, coinciding with a moderation in inflationary pressures. This trend underscores a promising resurgence in new business, fuelled by wage growth outpacing inflation rates and stimulating increased consumer spending on services. Germany changed from contraction to expansion within the services sector.

The recent manufacturing sector data is indeed concerning, particularly given the ongoing struggles of Germany and France, the key players in this sector. This decline is largely attributed to the impact of elevated interest rates. The European Central Bank (ECB) now faces a delicate balancing act: while inflation remains above the target range, the economy shows signs of weakness. The ECB seems primarily focused on tackling inflation, which in turn heightens the risk of a potential recession in Europe.
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