Monthly Economic Review: The Euro Zone

Now that Greece has successfully delayed its June 5 IMF payment, the downward pressure on the euro seems to have abated a bit. Although Greek debt worries still affect the European bond market, which has been on a selling spree lately, pushing bond yields higher and giving the euro a nice boost in the process.

Also, the European Central Bank (ECB) maintained the minimum bid rate at 0.05%, explaining at the recent ECB press conference that the 3-month old €1.1 trillion quantitative easing program is “proceeding well.” Well, is it? Time to find out!

Growth

The second estimate for Q1 2015 GDP showed no revision from the first estimate, with a 0.4% growth for the entire euro zone. A look at the major economies shows that both Italy and Germany only grew by 0.3% while France and Spain saw a healthy 0.6% and 0.9% growth respectively. The primary drivers for GDP growth were Gross Fixed Capital Formation (a fancy word for investments on infrastructure and fixed assets), Household Consumption, and Exports, which were up by 0.8%, 0.5%, and 0.6% respectively. Sounds pretty good so far, right?

Employment

The seasonally-adjusted euro zone unemployment rate for the month of April ticked downwards to 11.1% from 11.2%, which isn’t really a lot. Among the major euro zone economies, Germany performed the best with a jobless rate of 4.7% while Spain was the worst at 22.7%. France and Italy, meanwhile, had their jobless rates at 10.5% and 12.4% respectively. Among all member states, Germany was still in the lead while Greece, quite naturally, was the worse at 25.4%.

Consumer Spending

As mentioned above, consumer spending has been a primary driver for growth. But do the most recent data still tell the same story? Well, retail sales for the euro zone is up by 0.7% month-on-month in April, attributed to a 1.3% increase for food, drinks, and tobacco. Think of that what you will. A 0.6% increase for automotive fuel also helped, but unfortunately, the non-food sector only went up by 0.3%. In essence, Europeans were only buying what they really need.

The lack of interest in discretionary spending is reflected in the consumer confidence data, which sits in negative territory at -6 (-5 previous), indicating pessimism among consumers.

Business Sentiment

The average European consumer may seem pessimistic, but that didn’t appear to stifle business sentiment at all. Markit’s manufacturing purchasing manager’s index (PMI) has been above 50.0 since July 2013, indicating industry expansion, with the euro zone manufacturing PMI for May coming in at 52.2, little changed from April’s 52.3 reading. As for a breakdown by major euro zone economies, Germany had 51.1, Italy had 54.8, and Spain had 55.8. The only downer was France, which had a reading of 49.4, but that’s all right since France hasn’t seen its manufacturing PMI above the 50 level since the reading for April 2014.

Markit’s Services PMI has also been above 50, with final euro zone services PMI at 53.8. The major euro zone economies were in good shape too: 53.0 for Germany, 52.8 for France, 52.5 for Italy, and 58.4 for Spain.

And even though Greece has been a headache, Sentix investor confidence is still above zero at 17.1, indicating investor optimism. Still, it’s been receding for two months in a row now, from a high of 20.0 in April. That’s worth thinking about.

Inflation

It looks like the ECB’s quantitative easing program is doing what it’s meant to do. Euro zone annual headline inflation is up to 0.3% for May (0.0% previous) while core inflation is up by 0.9% for the same period (0.6% previous). The higher annual inflation was apparently driven by services, which went up by 1.3%. Food, alcohol and tobacco were also apparently in demand, increasing by 1.2%.

Summary

Overall, both growth and inflation in the euro zone seem to be picking up, which is within expectations and is a product of the ECB’s monetary policies (if you believe the ECB). Also, business sentiment seems to be pretty solid despite the problems with Greece. Unfortunately, the average European doesn’t seem to feel any of these positive developments since consumer confidence is still in negative territory and their primary purchases are “food, drinks, and tobacco.” Unemployment is also pretty high across the euro zone, except for a select few, which doesn’t really help to boost consumer spending and consumer confidence.

The final verdict is that we are seeing green shoots for the euro zone, which is a good thing. But such positive developments are still fragile and haven’t really trickled down to the level of the consumers. Also, it may be too early to be sure that a sustainable recovery is around the corner with Greek debt issues looming, but a “cautious optimism” is certainly warranted and may continue to take sellers out of the euro for now.