EU Economy: Weekly Commentary – 19 February, 2024
Europe View Synopsis
More economies (UK and Germany) have entered into a technical recession with Inflationary pressures a constant theme.
The European Central Bank is looking to cut rates in the second half of the year and starting to see signs of a recovery. High rates coupled with high prices means that any recovery is still distant. ECB faces a conundrum with the economy is struggling but inflation showed a rebound in January and probably will do the same in February. The growth forecast for the EU was revised down.
The European Central Bank is looking to cut rates in the second half of the year and starting to see signs of a recovery. High rates coupled with high prices means that any recovery is still distant. ECB faces a conundrum with the economy is struggling but inflation showed a rebound in January and probably will do the same in February. The growth forecast for the EU was revised down.
Economic sentiment commentary
The increase in Germany's ZEW economic sentiment index in February shows light at the end of a tunnel, providing a pocket of optimism.
The ZEW Indicator of Economic Sentiment experienced a rise in February 2024, both for the Eurozone and Germany. In the Eurozone, the indicator climbed to 25 points, while in Germany, it reached 19.9 points, marking the seventh consecutive monthly increase. The current situation index in Germany dipped to -81.7 in February (vs -77.3 Jan), indicating a second consecutive monthly reduction. In contrast, the Eurozone's current situation index saw an uptick, increasing by 5.9 points to a new reading of -53.4 points.
Turning our focus to Germany, the overall economic landscape remains challenging. Respondents' evaluations of the current economic situation have reached the lowest level since June 2020. On the positive side, economic expectations have improved, driven by anticipated future interest rate cuts from the ECB.
Our perspective around the German growth remains unchanged. The data does not provide encouraging signals that Germany will avoid another flat year. While there is a slight improvement in the numbers, it is unlikely to offset the structural challenges faced by the economy.
The ZEW Indicator of Economic Sentiment experienced a rise in February 2024, both for the Eurozone and Germany. In the Eurozone, the indicator climbed to 25 points, while in Germany, it reached 19.9 points, marking the seventh consecutive monthly increase. The current situation index in Germany dipped to -81.7 in February (vs -77.3 Jan), indicating a second consecutive monthly reduction. In contrast, the Eurozone's current situation index saw an uptick, increasing by 5.9 points to a new reading of -53.4 points.
Turning our focus to Germany, the overall economic landscape remains challenging. Respondents' evaluations of the current economic situation have reached the lowest level since June 2020. On the positive side, economic expectations have improved, driven by anticipated future interest rate cuts from the ECB.
Our perspective around the German growth remains unchanged. The data does not provide encouraging signals that Germany will avoid another flat year. While there is a slight improvement in the numbers, it is unlikely to offset the structural challenges faced by the economy.
GDP: Second revision and forecast
The eurozone economy stagnates. After the second review of the GDP, the data does not change.
The Eurozone narrowly avoided a technical recession in the last quarter of 2023 after experiencing a 0.1% decline in the third quarter. Notably, Germany, the largest economy, faces significant challenges, contracting by 0.3% with no immediate signs of improvement. Italy recorded a modest growth of 0.2%.
We foresee a turnaround as interest rates are cut, stimulating economic activity again. We do expect Germany is growth to be stagnant throughout the year, primarily due to the lack of improvement in its crucial manufacturing sector.
In the fourth quarter of 2023, the number of employed individuals increased by 0.3% in both the Euro area and the EU, compared to the previous quarter (0.2%). We anticipate a decline in employment in the first quarter of 2024, attributed to manufacturing sector weaknesses and a transitional period until summer when companies are expected to resume hiring activities.
The Eurozone narrowly avoided a technical recession in the last quarter of 2023 after experiencing a 0.1% decline in the third quarter. Notably, Germany, the largest economy, faces significant challenges, contracting by 0.3% with no immediate signs of improvement. Italy recorded a modest growth of 0.2%.
We foresee a turnaround as interest rates are cut, stimulating economic activity again. We do expect Germany is growth to be stagnant throughout the year, primarily due to the lack of improvement in its crucial manufacturing sector.
In the fourth quarter of 2023, the number of employed individuals increased by 0.3% in both the Euro area and the EU, compared to the previous quarter (0.2%). We anticipate a decline in employment in the first quarter of 2024, attributed to manufacturing sector weaknesses and a transitional period until summer when companies are expected to resume hiring activities.
Europe has revised down its projections for EU and Eurozone growth in 2024, remarking the effect of elevated interest rates on economic activity. The forecast for the Eurozone's GDP growth in 2024 has been adjusted downward from 1.2% to 0.8%. Similarly, Germany's anticipated growth for the same period has been revised from 0.8% to 0.3%. Consequently, Germany finds itself at the lower end of Eurozone countries in terms of predicted growth. This aligns with our expectations, although we hold a slightly more pessimistic outlook for Germany.
Industrial production
Eurozone industrial production was up 2.6% MoM mainly driven by Ireland. Most big manufacturing themes see a downtrend in production although we are seeing some early signs of a recovery.
Eurozone industrial production experienced a substantial surge in December, primarily attributed to a remarkable 23.5% increase in Irish production. However, it's crucial to note that contract manufacturing and subcontracting have significantly influenced the Irish economy over the past decade, introducing considerable monthly volatility to production figures.
If we exclude Ireland from the equation, overall industrial production only grew by 0.3%, with Germany continuing to exhibit weakness as its production declined by 1.2% in December. In contrast, France and Italy recorded growth of 1.1%. Despite these variations, the overarching trend in the Eurozone remains downward.
Forecasts do not anticipate a swift rebound in production, and challenges in the manufacturing sector persist due to supply chain issues linked to the Red Sea and the current climatologic situation in the Panama Canal. A positive note for the sector is the reduction in energy prices. While small improvements in PMIs indicate the sector may be almost touching the bottom and companies are growing more optimistic about losses, a full recovery remains far and is expected to be a gradual process.
Eurozone industrial production experienced a substantial surge in December, primarily attributed to a remarkable 23.5% increase in Irish production. However, it's crucial to note that contract manufacturing and subcontracting have significantly influenced the Irish economy over the past decade, introducing considerable monthly volatility to production figures.
If we exclude Ireland from the equation, overall industrial production only grew by 0.3%, with Germany continuing to exhibit weakness as its production declined by 1.2% in December. In contrast, France and Italy recorded growth of 1.1%. Despite these variations, the overarching trend in the Eurozone remains downward.
Forecasts do not anticipate a swift rebound in production, and challenges in the manufacturing sector persist due to supply chain issues linked to the Red Sea and the current climatologic situation in the Panama Canal. A positive note for the sector is the reduction in energy prices. While small improvements in PMIs indicate the sector may be almost touching the bottom and companies are growing more optimistic about losses, a full recovery remains far and is expected to be a gradual process.
Recession in the UK
The UK economy slipped into a technical recession in the last quarter of 2023. Consumer and government spending decreased. On the bright side, PMIs increased, with services in expansion territory.
The British economy officially entered a technical recession in the final quarter of the year, experiencing a contraction of 0.3%, following a 0.1% decline in the third quarter. This downturn in GDP is attributed to significant decreases in retail sales, services, industrial production (mainly the manufacture of machinery and equipment (-7%)), and construction. The negative impacts of these declines were somewhat mitigated by gross capital formation. However, amidst the challenges, there are positive indicators. PMIs, particularly in the services sector, have shown improvement, returning to expansionary territory. Additionally, both consumer confidence and wage growth have seen an increase.
Bank of England is focused on inflation, both wages and services, as criteria for cut rates. Salaries are growing but the rate of growth slowed. Inflation has regained attention because services inflation rebounded, which will prompt the Central Bank of England to keep higher interest rates for longer.
The British economy officially entered a technical recession in the final quarter of the year, experiencing a contraction of 0.3%, following a 0.1% decline in the third quarter. This downturn in GDP is attributed to significant decreases in retail sales, services, industrial production (mainly the manufacture of machinery and equipment (-7%)), and construction. The negative impacts of these declines were somewhat mitigated by gross capital formation. However, amidst the challenges, there are positive indicators. PMIs, particularly in the services sector, have shown improvement, returning to expansionary territory. Additionally, both consumer confidence and wage growth have seen an increase.
Bank of England is focused on inflation, both wages and services, as criteria for cut rates. Salaries are growing but the rate of growth slowed. Inflation has regained attention because services inflation rebounded, which will prompt the Central Bank of England to keep higher interest rates for longer.
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No representation or warranty, express or implied, is made by Dolfin Fund Management Ltd or any of its directors, officers or employees as to the accuracy, completeness or fairness of the information in this document and no responsibility or liability is accepted for any such information (save in respect of fraudulent representation or warranty).
This document may not be reproduced, redistributed or passed on to any other person or published, in whole or in part, for any purpose without the prior written consent of Dolfin Fund Management Ltd.
Dolfin Fund Management Ltd, a company registered in Malta (registered number C71750), authorised and regulated by the Malta Financial Services Authority (licence number IS71750).
Copyright © 2023 Dolfin Fund Management Ltd. All rights reserved.