Well, that was brief. Just months into a much-needed respite from incessant bad news, things aren’t looking so hot in Europe again. Some of the continent’s most important growth indicators have fallen in recent months, fueling concern among investors that its nascent recovery could stall. Another slump would return focus to peripheral countries’ debt repayment capabilities at a time when they’ve finally been seeing the light at the end of the tunnel. And Europe would again become a drag on the global economy, a return to a role the continent played during its 2011-12 recession. The European Central Bank just announced an extraordinary easing program in June, but in the event of a continued slowdown, it might be forced to implement additional measures to stimulate the Eurozone economy.
The numbers speak for themselves. Eurozone industrial production fell sharply in May, notching a 1.1 percent month-on-month decline that was led by a drop in the production of intermediate goods such as vehicles as well as non-durable items such as food. Things are even challenging in the continent’s economic powerhouse, Germany: the Ifo Survey, which measures the country’s business climate, fell to 108 in July from 109.7 in June, the third straight monthly decline. Credit Suisse estimates that the Euro economy may have only grown 0.2 percent last quarter. “Unchanged or falling GDP in the second quarter would certainly concentrate concerns in markets that the recovery has stalled at a worryingly early stage,” Credit Suisse analysts Christel Aranda-Hassel and Mirco Bulega wrote in a recent report entitled “Mayday.”
But it’s not likely to come to that. Although it sounds trivial, a calendar issue likely exaggerated the drop in industrial production. When bank holidays fall on a Thursday in Europe, workers tend to take Friday off as well to have a long weekend. But official statistics still count the Friday as a full working day, which puts a damper on output. Over the past 30 years, Eurozone industrial production has contracted an average of nearly 2 percent in May in years when May Day occurred on a Thursday.
As for the drop-off in German business confidence, Credit Suisse thinks it may be more of an external problem than an internal one. Global industrial production and trade growth slowed considerably in the first half of the year, and the continent’s recent re-convergence with the global economic cycle means that at least some part of the continent felt the pain, thereby explaining the decline in business confidence. But global production likely troughed in June and is on track to improve in the second half of the year. The Eurozone Purchasing Managers Index for manufacturing and services, for example, rose to 54 in July, marking the 13th consecutive month that it exceeded 50, the threshold that signals an expansion.
If one takes into account both seasonal and external factors, then, the European situation doesn’t seem so dire. As for the domestic front, the fact that the recession was largely driven by a downturn in consumer spending and business investment, the recovery will have to be fueled by their reversal. And both remain healthy. While Eurozone consumer confidence did fall from June to July, that’s a one-month setback in an otherwise steady rise since its low of minus 26.9 in November 2012.
Other factors also augur for continued recovery. The fiscal drags on the economy that persisted during the crisis are dissipating. Drastic ECB easing programs including negative deposit rates and a low-interest loan program for Eurozone banks should spark more bank lending and thus more economic activity. While many banks have been reducing lending to strengthen their balance sheets ahead of the central bank’s impending Asset Quality Review process, that process will be over by autumn. “Likely weak GDP growth in the second quarter certainly means the durability of recovery will remain in question for the next few months or so,” say Aranda-Hassel and Bulega. “But we expect reliable leading indicators of euro area growth to improve in the second half of the year.”