Economic Snapshot: Euro Zone

Did the European Central Bank (ECB’s) latest round of stimulus have positive effects on the euro zone economy?

Let’s take a quick look at the region’s indicators for the answers!

Growth

  • Though revised lower, the Q1 2016 GDP still marks the region’s fastest growth in a year and puts the euro zone’s growth back to its pre-2008 financial crisis levels.
  • Germany led the euro zone’s growth on the back of strong domestic consumption and construction activity.
  • Growth in the 3 biggest economies (Germany, France, and Italy) all accelerated while Spain, the 4th largest economy, maintained its 0.8% rate.
  • Greece went back into contraction with a 0.4% decline, the biggest drop among the member states.
  • No details on the components yet, so all eyes are on Germany sustaining its fastest growth in two years.

Employment

  • The 10.2% unemployment rate is the lowest since August 2011.
  • Unemployment has averaged at 10.9% in 2015, the lowest since 2012. It has been falling steadily after peaking at 12.1% in April 2013.
  • Core vs. peripheral countries: Greece (24.4%), Spain (21.0%), and Cyprus (12.1%) have the highest unemployment rates while Germany (4.2%), Malta (4.7%), and Austria (5.8%) have the lowest.
  • Youth unemployment continues to be a social and economic problem though it has eased from 21.7% to 21.2% in March.
  • The huge disparities in employment conditions make it difficult for the ECB to pinpoint its policies. So far though, Germany seems content to go along with the ECB’s easy monetary policies.

Inflation

  • Annual inflation is down by 0.2% in April after showing 0.0% in March. The core figure also came in at 0.7%, lower than March’s 1.0% figure.
  • 17 out of 19 economies have registered negative annual rates and 12 of the 19 have inflation that’s equal to or higher than the regional average.
  • Restaurants and cafés (+0.13%) and rents (+0.08%) led the move higher while fuel for transport (-0.54%), heating oil (-0.22%), and gas (-0.13%) were the biggest drags.
  • March’s figures were likely boosted by the early Easter holidays.
  • The weak to negative inflation figures underscore the importance for the ECB to maintain its easy monetary policies.

Businesses

  • The PMIs in May are preliminary readings, which could still be revised in their final releases.
  • The euro zone flash PMI composite output index came in at its weakest in 16 months with new businesses rising at its slowest pace since January 2015.
  • The service sectors still carry the weight of overall growth while the manufacturing industries slowly show modest improvements.
  • Easing concerns over China as well as the ECB’s additional stimulus have helped business optimism in March and April.
  • The mixed picture in the surveys after Q1 2016 support concerns that the strong growth in Q1 2016 might prove to be temporary.

Consumers

  • With businesses facing weaker demand for their exports, consumer spending has been driving the region’s economic growth for the last 18 months.
  • The decline in retail sales in March was the biggest since July 2014. It was led by food, drinks, and tobacco (-1.3%) and non-food products (-0.5%).
  • Euro Zone consumer confidence is at a 4-month high in May though it’s still below 2015 levels, which hints at caution despite the decline in unemployment and the ECB’s additional stimulus.
  • The recent increases in energy prices as well as the spotty recovery in employment could make it hard for consumers to continue propping up growth in the region.

TL;DR? Here’s a neat chart that summarizes the figures for ya!

Euro Zone

Putting it all together

Looking at the chart above, there’s no denying that the euro zone had a spectacular start to the year, thanks in part to low oil prices, the Easter holidays, and the ECB’s latest round of stimulus propping up business sentiment.

However, market players are concerned that the region won’t be able to sustain its momentum in Q2 2016. Already the rise in oil prices is threatening consumer spending while the weak global demand and tepid business investment are making it difficult for the ECB to achieve its inflation targets. The mixed releases across the region aren’t helping either, as they highlight the challenge in implementing a single monetary policy for economies with different needs.

For now though, it seems like the green shoots in the euro zone are enough to keep the ECB in the sidelines. It won’t be a stretch to imagine the ECB on a “wait and see” mode for the next couple of months as it continues to review the impact of its latest round of stimulus.


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