The Eurozone has been experiencing a renewed slowdown economically over the last two quarters, with large countries such as Germany and France facing significant headwinds. It is particularly weak with little policy space, as the world economy is beginning to experience a slowdown from the expansion that began truly heating up in 2017.
Let us begin with the fundamentals. The Eurozone and its major economies, Germany, France, Spain and Italy, contain significant export-focused sectors and with the US-China Trade War, as well as a global slowdown, they are all experiencing a greater slowdown than other countries. Eurozone manufacturing is currently on a downward trend, demonstrating how this lack of global demand is hitting the private manufacturing output of Europe (see graph).
The uncertainty about United Kingdom's exit deal, and subsequent future relationship with the EU also raises the stakes in the Eurozone, for even though the UK will experience a larger downturn in the event of a No-Deal, the EU will still suffer economically from the rising of trade barriers with an important partner. This is shown below with OECD data published in their interim Economic Outlook paper. The gradual slowdown in China is also affecting Europe, predominantly through its linkage as a major trading partner with Germany, which exports significantly more to China than any other Eurozone economy. These factors all contribute to the general slowdown in export growth both intra- and extra-Eurozone.
These factors have led EU GDP growth to begin to diverge from the United States GDP growth.
Subsequently, this has been leading to the gradual depreciation of the Euro to the USD in the foreign exchange markets, which should be providing some buffering for the Eurozone in terms of exports but has not been reflected in the data as of yet, which is seen by comparing the EUR/USD rate to the Eurozone export volume growth chart seen above.
All these factors must have been weighing on Mario Draghi and the ECB Council's minds when they agreed to continue maintaining their interest rates at their respective levels through until the end of 2019, and with the comment "in any case for as long as necessary to ensure the continued sustained convergence of inflation to levels that are below, but close to, 2% over the medium term." demonstrates the dovish stance of the ECB. The ECB is also continuing to reinvest their proceedings from past asset purchases, and will launch a new refinancing operation to ensure ample liquidity and favorable lending conditions among this onslaught of negative sentiment coming out of the EU since Draghi attempted to say the Eurozone began to carry enough momentum to not need as strong as strong as the ECB has been giving it since the Euro Crisis. This will operate as a double-edge sword, as investors know that the ECB is in full support of the domestic economy, a question that once was prevalent in investors' minds, but it also shows the weakness of the economy for this level of support being needed
The Eurozone, as negative as its economic data has been lately, has been through worse, and has some bright spots among its indicators. Consumer confidence has been on a downward trend, but had a significant blip upwards again showing the growing strength of domestic consumption, which could potentially help push the Eurozone through this tough time in the global economy.
The Eurozone's labor market in the major economies has also been tightening, which bodes well as lower unemployment can mean more investment, more consumption, and more energy left in economic growth, with Spain being the largest outperformer though from a high rate. This ties in well with what the OECD has been reporting as higher nominal wage growth in the low-inflation euro-area.
Eurozone fixed capital investment has also finally reached its pre-crisis levels boding well for its medium-term economic growth, though it has been lagging behind the US and could risk being stuck behind the US in terms of innovation growth again.
There is a lack of political will across the EU right now to continue to shore up any of their institutions with the EU elections in May being around the corner, but since the publication of Emmanuel Macron's OP-ED speaking to a reform of the EU and a potential European Renaissance, if the Eurosceptic parties do not achieve a majority, there seems to be the consensus building that the EU needs to reform, even though AKK from Germany's CDU has disagreed with some of Macron's content, she agreed with the need to change, which could bode well for medium term pick-up in the value of the EZU ETF.
The EZU ETF has large exposure to the major euro-area economies spoken about in this research piece, and provides to investor a well-balanced, cohesive play on the future of the European economy. This growth is reliant on the European community reforming after May's elections, and for this current downturn to be only a blip due to geopolitical concerns, but with consumer confidence raising, and ECB support, the Eurozone should continue to grow modestly in the near future.
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