A Eurozone Recovery Is In Sight

This chart of U.S. and Eurozone industrial production shows the huge divergence in economic activity that has opened up in the past several months between the U.S. and Europe. From the looks of this chart, the Eurozone economy has probably been in the grips of a modest recession since last September, no doubt sparked by the financial turmoil created by the Eurozone sovereign debt crisis.

In any case, the behavior of swap spreads—a reliable indicator of systemic risk and a good leading indicator of economic behavior—suggests that the financial strains which have slowed the Eurozone economy have diminished significantly this year. That points to a Eurozone recovery that should be getting underway soon, if not already.

The first of the above two charts tracks German business confidence, and it is noteworthy that it has turned up in the first two months of this year after a sharp contraction which paralleled the decline in Eurozone industrial production. The second chart measures German Industrial Production, and here too we see emerging signs of what could prove to be a bottom.

Finally, I note that the Euro Stoxx Index has turned up, albeit quite modestly. Stocks typically are able to sniff out recoveries before they officially happen (e.g., the U.S. equity market turned up about 3 months prior to the mid-2009 recovery started), and there's no reason to think that isn't the case today. The Eurozone recovery is likely to be a modest one, however, because Europe is still burdened by excessive government spending. Nevertheless, progress is being made, and simply halting the growth in spending ought to be enough to improve sentiment and, in turn, growth.