The short path from recovery to dip
Sentiment on the financial markets has clearly deteriorated in recent weeks. This was reflected in a substantial correction on the global stock markets and a further decrease in the European long-term interest rate. While stock markets subsequently recovered, the developments of recent weeks have left some investors shaken. But there is still no reason to panic.
Lower sentiment can largely be attributed to the recent disappointing economic figures from Germany. This is striking considering that negative developments in the real economy have had virtually no effect on market sentiment until recently.
This is why it is important to point out that disappointing economic figures from Germany should be viewed against the background of various negative factors that had already been at play in recent months. Examples include the growth slowdown in a number of emerging markets, geopolitical tensions and concerns about specific developments in a few eurozone member states, such as the French budget issue and political instability in Greece.
Late timing summer holiday
Given that industrial production in the other three large eurozone countries (France, Italy and Spain) either remained stable or rose slightly, it appears that the downturn in Germany is an isolated development. What’s more, the weaker industrial production data from Germany is partially attributable to the late timing of summer holidays in the country!
In recent quarters we have seen domestic demand within the eurozone once again start to show clear signs of recovery. We see, for example, real household disposable income beginning to improve gradually due to low inflation and the recent recovery in employment. There has certainly been significant growth in real wages in Germany. Consumer confidence in the country has, however, been impacted by the conflict in Eastern Ukraine, even though consumer confidence remains above the long-term average in many countries. For example, consumer confidence appeared to be already recovering slightly in October in a few eurozone member states, including the Netherlands.
The fear of a looming recession is consequently unjustified. This does not, however, detract from the fact that the eurozone’s starting position remains extremely weak and that the recovery is fragile at best. Various factors will, after all, continue to slow down growth in domestic demand in the coming years. The most important inhibitors of growth are the continuing necessity to reduce public and private debt and very sluggish bank lending.
Capricious market sentiment
The negative impact of these developments will gradually decrease in the years ahead. This scenario also forms the basis for the forecast that average inflation in the eurozone will remain low for an extended period, while employment will in contrast remain high. Looking further into the future, the expectation is that the eurozone will have to become accustomed to lower economic growth due to factors including an ageing population and lower forecast growth in labour productivity. The developments of recent weeks are a warning that Europe must not start seeing the gradual improvement in sentiment of the last two years as a given. In a world full of geopolitical risks and capricious market sentiment, it is a short path from a fragile recovery to a temporary dip.
Wim Boonstra, Head of the Economic Research Department