EU Economy: Weekly Commentary – 29 April, 2024
European Market Review
Stock markets shrugged of rising European bond yields with Spanish and Portuguese markets leading. EUR/USD remained stable. Brent crude spiked due to the Middle East and Russia-Ukraine tensions, raising energy supply concerns.

European bond yields experienced an uptick, yet this movement didn't influence the stock market, which maintained its buoyancy throughout the week. Notably, the Spanish and Portuguese markets showcased robust growth, underlining their resilience. The EUR/USD exchange rate hovered around 1.0693, mirroring the flow of market sentiment and economic metrics. Meanwhile, Brent crude prices surged once more, driven by the escalating conflict between Israel and Palestine and the Russia-Ukraine war continued to put global energy supply routes at risk, fuelling concerns over energy supply stability.
Europe View Synopsis
Eurozone PMI rises to 51.4, driven by German and French services growth; inflation persists amid challenges. German business sentiment improves, but obstacles remain, potentially impacting EU growth. Meanwhile, German consumer confidence strengthens, suggesting increased spending despite lingering structural weaknesses.

The eurozone shows signs of recovery with an uptick in the Composite PMI to 51.4, led by services growth in Germany and France. Germany and France struggle in manufacturing. Inflationary pressures persist. German business sentiment improves, but challenges remain, potentially affecting EU growth. German consumer confidence rises, hinting at increased spending amid structural weaknesses. Germany's recovery may lag, impacting EU growth, but Spain and Italy could offset German weakness.
Business activity
Signs of recovery in EU. Germany and France, in particular, struggled in their manufacturing sectors. Moderate inflationary pressures.

The economic outlook for the Eurozone is displaying signs of recovery, as reflected in April's composite PMI, which surged to 51.4, marking the second consecutive increase after nine months of decline. Particularly notable is the expansion witnessed in the services sector, exemplified by a 1.4-point increase in the index to 52.9, primarily propelled by leading economies like Germany and France. United Kingdom experienced a resurgence, with its composite PMI climbing to 54.0, driven by a significant upturn in services, where the index rose by 1.8 points to 54.9.

Nevertheless, amid this optimism, challenges persist. While the rebound in PMI signals a pivot towards growth, concerns regarding inflationary pressures persist. Rising wages and energy prices, notably oil prices, pose risks to cost inflation. Despite a rebound in services inflation, it remains below previous levels, while goods inflation remains in negative territory, indicating moderate inflationary pressures overall. As the region navigates uncertainties, the prospect of rate cuts by the ECB looms large, likely playing a pivotal role in sustaining positive momentum and driving a properly environment for growth.

The economic prospects for the Eurozone appear optimistic as it emerges from a prolonged period of stagnation since late 2022, pushed by historic lows in unemployment and a declining trend in inflation. The commencement of rate cuts is anticipated to have a favourable impact on the economy, particularly stimulating a recovery in the manufacturing sector by year-end. In our view, Germany may serve as a drag on European growth in the second and third quarters of the year.
German business sentiment
Ifo index signals German economic recovery post-2023. Despite hurdles like geopolitical tensions or internal issues, gradual improvement hints at potential EU economic impact in upcoming quarters. We do not expect a positive impact until Q4.

Promising outlook for the German economy, signalling a resurgence after a challenging 2023. With 3 consecutive months of rebounds, reaching levels not seen since the previous year, optimism is on the rise in the market. This upward trend indicates that Germany may have overcome its economic downturn, propelled by improvements in current conditions, which rose from 88.1 to 88.9, and future expectations, surging to 89.9 (vs 87.7 in March).

However, amidst this optimism, it's crucial to acknowledge the persistent structural challenges that could hinder a swift and robust recovery. Geopolitical tensions, the manufacturing sector dropping, and lingering issues in the labour market continue to loom large.

Despite some improvements, the Ifo index reflecting current conditions still indicates a contraction in GDP, amidst stagnant revenues, weak external demand, and high rates. While enhancements were noted in the services sector, the manufacturing sector continues to struggle, and issues persist within the commercial and construction industries. Nonetheless, recent data, including the composite PMI and monthly activity indicators, suggest a gradual emergence from the recession.

We expect the German economy to drag the EU economy in the next two quarters. Germany should start to recover at the end of the year when the rates start to affect the economy.
German consumer sentiment
German consumer confidence rises, hinting at increased spending. Economic recovery faces challenges but signals optimism. Spain and Italy may offset German weakness.

German consumers are showing signs of optimism, with consumer confidence reaching its highest level in two years in May, increasing up to -24.2. This improvement, alongside recent positive macroeconomic news, hints at a potential uptick in private consumption.

German consumers remain cautious, with indications of increased willingness to spend and save. While the German economy is experiencing cyclical improvements, driven by various sectors including industry (uptick in production), trade, and construction, private consumption has lagged. However, with nominal wage increases and the prospect of improved real wages during the year, there is optimism for a gradual recovery in private consumption. Yet, high prices, particularly in energy and commodities, geopolitical uncertainties, and cautious consumer behaviour may temper the extent of this recovery. Despite these challenges, the return of optimism marks a positive shift after a period of disappointing macroeconomic news, though structural weaknesses still pose risks to sustained growth.

We expect that the consumer struggle will continue until the end of the year. Germany could face a flat year and reduce European economic growth. Weakness in Germany could be offset by countries such as Spain or Italy which are showing better economic conditions.
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