Monthly Economic Review: The Euro Zone

Many forex traders have been dumping or avoiding the euro due to the Greek debt drama lately, but is the rest of the euro zone really that weak? Time to find out!

Growth

The final GDP reading for Q1 2015 showed 0.4% growth for the entire euro zone, thanks to stable domestic demand and a pickup in net exports. Among the major economies, Germany and Italy grew by 0.3% while France and Spain grew by 0.6% and 0.9% respectively.

euro zone gdp

Source: Eurostat

The future prospects for GDP growth look promising also since the first estimate for the entire euro zone’s trade data for April indicated a trade surplus of €24.9B, with exports increasing by 9% year-on-year and imports rising by 3% year-on-year.

Employment

The euro zone’s seasonally-adjusted jobless rate for May 2015 remained unchanged at 11.1% when compared to the previous month, but it saw an improvement relative to May 2014’s 11.6%. Apparently, the current jobless rate is the lowest level to date since March 2012.

Among the major euro zone economies, the report shows that Germany was ahead of the pack with 4.7% joblessness while debt-ridden Spain was at the bottom with an alarmingly high 22.5%. Italy and France were in the middle with 12.4% and 10.3% respectively.

euro zone employment

Source: Eurostat

Consumer Spending

The reading for May’s retail trade data went up by 0.2% (0.7% previous) for the month of May, thanks to “food, drinks and tobacco” and non-food products increasing by 0.4% each. The main drag came from automotive fuel, which fell by 0.7%. On a year-on-year basis, retail trade went up by 2.4% (2.7% previous).

Overall, the report hints that European consumers are only buying the stuff that they really need such as food, clothing, and medical goods. Products that aren’t really necessary, like electrical goods and furniture, didn’t see any noticeable pickup in volume. Moreover, the European Commission’s flash consumer confidence indicator remained steady at -5.5, indicating that the average European consumer is still quite pessimistic.

Business Sentiment

Despite all this fear-mongering due to the Greek drama, business sentiment remained relatively high. Markit’s manufacturing PMI for June came in at 52.5 for the entire region, a slight improvement over the previous 52.2 reading, which indicates that expansion accelerated.

Looking at the major euro zone economies, Spain and Italy were high on the list at 54.5 and 54.1 respectively. Germany and France, meanwhile, were doing A-okay at 51.9 and 50.7 respectively. Based on the historical trends, Italy and France have been showing significant improvements while Spain and Germany are relatively stable.

markit pmi

Markit’s services PMI saw an improvement too, with a 54.4 reading for June (53.8 previous). The Sentix investor confidence indicator also reflected optimism, ticking higher to 18.5 for July from June’s 17.1. On the other hand, the European Commission’s business climate indicator for June still showed optimism, but it declined to 0.14 from 0.28.

Inflation

Eurostat’s preliminary estimate for the June headline CPI showed a downtick from 0.3% to 0.2%. The preliminary reading for core CPI also fell a bit from 0.9% to 0.8%.

Looking at the components of the report, the main drivers for the decrease were services (1.0% current, 1.3% previous) and energy (-5.1% current, -4.8% previous). Non-energy industrial goods increased from 0.2% to 0.4% while food, alcohol, and tobacco remained steady at 1.2%. It’s still an increase, though, and that’s a good thing. Remember, headline inflation has been in the red or flat since November 2014 until the reading for May came in at 0.3%.

euro zone cpi

Source: Eurostat

Summary and Potential Effects on the Forex Market

Looks like the euro zone is seeing some signs of a recovery in line with the European Central Bank’s (ECB) expectations. Heck, ECB President Mario Draghi was practically boasting when he said in the latest ECB press conference that “the recovery is on track, exactly according to our projections.”

So what do all these mean to forex traders and price action? Well, economic data shows that the euro zone’s fundamentals are strengthening, which could mean some demand for the euro. For now, this seems to be overshadowed by pessimism due to the Greek drama and a few other factors weighing on forex market risk appetite. Moreover, the recent monetary policy meeting accounts states that the ECB “reaffirmed its intention to carry out asset purchases of €60 billion per month until the end of September 2016,” which suggests that the dovish bias might still limit the euro’s gains.