With so many global crosscurrents clouding the global economic picture, a slowing European outlook comes at an interesting moment in time. After growing the most in ten years this past November, economists are looking at signs of a weakening EU outlook amid global trade concerns and central bank policy normalization.
German exports took an unexpected nosedive in February, posting their largest monthly drop in over two years, data released Monday shows. Seasonally adjusted exports were lower by 3.2%, the biggest fall since August 2015, while imports slowed by 1.3%, Germany’s Federal Statistics Office revealed.
“It looks as if we have surpassed the top of the economic upswing,” HSBC Trinkhaus analyst Lothar Hessler told Reuters, pointing to a stronger euro as part of the problem. “The German economy will continue to grow, but with less momentum.”
It is not just Germany, the primary economic engine in the region, where the slowdown is being felt.
Capital Economics European Economist Stephen Brown notes that a “broad-based softening” is taking place. Both manufacturing and services purchasing manager’s indexes (PMI) have been coming off highs recently across the region.
The slackening PMIs are coming as European Commission’s Economic Sentiment Indicator came off its recent high of 115.3 in December to post 112.6 in March, a weakening that is mirrored by other data such as euro-zone retail sales rising by just 0.1% in February after German industrial production limped in at 1.6%.
There could be several reasons for the slowdown, with Brown noting that capacity constraints could be an issue. European firms reporting they had inadequate levels of equipment rose to the highest level since the second quarter of 2011 while those indicating a lack of employees was holding back their activity to the highest level since 2003. Contrast this with those reporting a lack of demand was the problem being at the lowest level since the financial crisis.
“If firms are facing capacity constraints, then it’s important to distinguish between short-term constraints on the one hand and bottlenecks which cannot be overcome on the other,” Brown wrote in an April 6 research note. “This probably reflected companies that had shed workers and held back from investment during the crisis struggling to keep up with the sudden recovery in demand, despite the fact that there was clearly ample spare capacity in the economy overall.”
With unemployment now generally 2% less than it was in 2010, firms that have held back hiring might be hard-pressed to ramp up production suddenly.
But while capacity constraints might explain some of the economic numbers slowing, there are more ominous signals emerging on the demand side of the equation.
Worldwide economic growth is beginning to slow. A recent Macquarie report noted that global growth has peaked and that the economy is entering a “dangerous new phase.” US-China trade war tensions are casting a global pale of uncertainty as China recently took the unusual step of asking the European Union to side with it in its dispute with the US. And then there is the ever appreciating euro currency, which makes exports more expensive and less desirable, but consumer imports are also more attractive.
Add to this the specter of the European Central Bank withdrawing its quantitative stimulation and even the thought of withdrawal is giving markets jitters.
Brown notes that despite the fact ECB QE remains ongoing, a bid has left the credit markets, which has deteriorated since January. Quality bonds have seen only slight yield increases, but sub-investment grade corporates have seen yields rise by nearly 50 basis points as equity prices have, likewise, seen problems.
While there is a reason to be optimistic, Brown notes the risks “seem tilted slightly to the downside,” he wrote. “And with external factors causing financial market conditions to tighten, all this increases the risk that the ECB will act even more cautiously than we currently assume.”
