A stronger euro is hampering the Eurozone’s exports, while elevated political risks stemming from Brexit and US trade policy uncertainty are affecting the bloc’s business climate, resulting in a slight slowdown in the Eurozone’s overall economic output.
Kristian Rouz — The Eurozone’s pace of economic expansion slowed in February due to decreased business confidence. This comes as a stronger euro hit the 19-country bloc’s exports, with negative effects passed on to the manufacturing sector, while the tumultuous Brexit talks caused a mix-up in the continental stocks.
According to a report from IHS Markit, Eurozone business activity slowed this month, albeit still remaining near its highest levels since before the global economic crisis of 2008-2009.
Markit’s Purchasing Manager’s Index (PMI) for the Eurozone’s private sector dropped to 57.5 points in February from 58.8 points — its 12-year highest — the previous month. Readings above 50 points indicate expansion.
This comes as European stock markets were hit by the heightened political risks that accompany the Brexit process, as well as new developments across the ocean. Some investors see US President Donald Trump’s trade agenda as potentially hampering the profitability of European enterprises, while elevated concerns over a possible ‘hard Brexit’ scenario threaten disruptions in the intra-European trade ties.
However, the slowdown hasn’t stirred much concern among European market participants, as it was already priced in to their near-term business planning.
“The abrupt end of the long period of nonchalance on the financial markets appears to have also put a damper on the euphoric mood in the Eurozone economy,” Christoph Weil of Commerzbank said. “But today’s data do not signal an end to the economic upswing in the Eurozone.”
Separately, Eurozone inflation, a key indicator determining the European Central Bank’s (ECB) approach to monetary policy, slowed last month, suggesting the ECB will keep its stimulus measures in place. This spurred demand for bonds, and contributed to the recent retreat in stocks.
According to Eurostat, consumer prices fell a whopping 0.9 percent month-on-month in January, resulting in a 1.3-percent year-on-year increase — far below the ECB’s 2-percent target. This comes as the single currency strengthened against its major peers, rendering imports cheaper, and suppressing inflation as a result.
The ECB has been buying tens-of-billions-of euros worth of private sector bonds sines the European debt crisis in 2011 in order to provide money liquidity to banks and support their lending activity. These measures are poised to remain in place despite the concerns the amount of assets available for purchase has dramatically declined, limiting private sector competitiveness.
Additionally, IHS Markit experts said the Eurozone is still headed for a gradual economic acceleration, with quarter-on-quarter GDP growth expected at 0.9 percent in the January-to-March period. Meanwhile, the bloc’s year-on-year growth is expected at just below 4 percent — much stronger than that in the US and UK.
“The rate of expansion remains impressive, putting the region on course for its best quarter for almost 12 years,” Chris Williamson of IHS Markit said.
In the fourth quarter of last year, the Eurozone’s economy rose 0.6 percent month-on-month. The bloc’s unemployment remains rather high, while dismal wage growth is also suppressing inflation. This is not least due to the influx of migrants from Africa and the Middle East adding to the bloc’s pool of available cheap labor.