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FEATURE
EurozoneEconomy shifting down a gear
Alexander Börsch
2
Economic sentiment: Contradictory signs
The Purchasing Managers’ Index, one of the leading early economic indicators, accurately il-lustrates the current economic situation of the Eurozone (figure 1). Values above 50 indicate growing production. The index shows a downward trend since December, but remains in the positive territory. Another sentiment index, the ifo Eco-nomic Climate Index for the Eurozone, reached its highest value since 2000 in the first quarter, but fell considerably in the second. While the economic
situation is still seen very positively, expectations have deteriorated.1 Overall sentiment and economic momentum are on a downward trend, but the big economic picture still looks good.
Strong labor market, resilient consumer spending
In the real economy, several trends shaped the economic performance. Exports dropped in early 2018, following very strong growth in the second half of 2017, possibly due to a strong euro and a
The Eurozone economy entered the year with enthusiasm. In 2017, growth was the highest since the financial crisis, and political risks in the region seemed to have disappeared. Six months later, things look less promising. The recov-ery has lost steam, while economic expectations have become more pessi-mistic. Nevertheless, the recovery seems to continue, albeit at a slower pace than expected.
60
62
64
52
Jun2017
Jul2017
Aug2017
Sep2017
Oct2017
Nov2017
Dec2017
Jan2018
Feb2018
Mar2018
Apr2018
May2018
Jun2018
50
54
56
58
Source: Markit, Statista.
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FIGURE 1
The Purchasing Managers’ Index is declining, but remains above 50Index value (50 = no change)
56.657.4
58.158.5
60.160.6
59.6
58.6
56.656.2
55.554.9
57.4
Eurozone: Economy shifting down a gear
3
slowdown in world trade. In contrast, corporate in-vestments have been growing firmly, while private consumption has been the main driver of growth.
Consumer spending has remained resilient on the back of declining unemployment. It is at a 10-year low of 8.4%, down from 9.2% one year ago.2 In absolute terms, it means that 1.2 million more people are in employment than were in mid-2017.
Nonetheless, differences in labor market perfor-mance and unemployment rates still differ widely between countries—unemployment ranges from 2.3 percent in the Czech Republic to 20 percent in Greece. Yet the overall trend is clear. The unemploy-ment rate has been falling across member states, and the rising number of jobs is strengthening the purchasing power.
A possible threat for consumer spending comes from rising inflation. After years of very low infla-tion and deflation fears, inflation has picked up,
springing to 1.9% in May, driven largely by rising energy prices. Core inflation stands at 1.1%. As wages have been growing only moderately, real income might fall, thereby dragging consumer spending.
Political risks and European integration
The more uncertain outlook has also to do with new political risks, including an escalating global trade conflict that could potentially damage Eu-rope’s export-oriented economies.
There are several regional risks too. A hard Brexit, for example, remains a realistic scenario. The anti-European Union rhetoric of the new populist Italian government raised concerns that Italy could leave the Eurozone or disregard its rules.
7.5
8.0
8.5
9.0
9.5
Percent
5.5
May2017
Jun2017
Jul2017
Aug2017
Sep2017
Oct2017
Nov2017
Dec2017
Jan2018
Feb2018
Mar2018
Apr2018
May2018
Une
mpl
oym
ent r
ate
5.0
6.0
6.5
7.0
Source: Eurostat, “Euro area unemployment at 8.4%,” July 2, 2018.
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FIGURE 2
The unemployment rate in the Eurozone and the EU-28 (%)
7.6 7.57.3 7.2 7.2 7.1 7.1 7.07.0
7.47.7
9.2 9.1 9.1 9.18.9 8.8 8.7 8.6 8.7 8.6 8.5 8.4 8.4
7.7 7.7
EU-28 Eurozone
Eurozone: Economy shifting down a gear
3
4
The recently formed German government showed signs of instability due to a disagreement among the governing conservative parties regarding immigra-tion and asylum policy. Member states in Eastern, Western, and Southern Europe also have similar disagreements over the issue.
Overall, governing the Eurozone and the Eu-ropean Union has become more complicated. Nonetheless, efforts are underway, driven by the French government, to reform the governance of the Eurozone. This will, however, require consensus-building among the member states.
Businesses favor deeper integration
Despite these complications, companies seem supportive of the European Union and keen to develop it further. In a recent survey of German companies, two-thirds responded in favor of having
greater centralization of the European Union or greater cooperation in selected areas.3 Only 12% preferred to return competencies from the regional to the national level.
The path to deeper integration—by selective deepening and/or stronger centralization—certainly has diverse implications, open to much political dis-cussion. Nonetheless, businesses seem keen on the European Union moving forward.
Source: Deloitte Brexit Brie�ng 8: Brexit and the impact on Germany—company perspectives, June 2018.
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FIGURE 3
Future form of the European UnionQuestion: Toward what goal do you think the EU should develop in the post-Brexit period?
Returning competencies to member states and stronger decentralization
Maintaining the status quo
Deepening of selected policy areas (foreign
policy, migration policy)
Stronger integration and centralization (Eurozone finance minister, Eurozone budget, shifting of competencies to the EU)
12% 37%
20%28%
Eurozone: Economy shifting down a gear
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1. CESifo Group Munich, “ifo economic climate for the Euro area cools down,” May 2, 2018.
2. Eurostat, “Euro area unemployment at 8.4%,” July 2, 2018.
3. Deloitte, Deloitte Brexit briefing 8: Brexit and the impact on Germany—company perspectives, June 2018.
Endnotes
ALEXANDER BÖRSCH is the chief economist and head of research at Deloitte Germany. Before joining Deloitte, he worked as senior economist in the investment management and management consulting industries. He is the author of numerous publications on topics such as the European economy, eco-nomic trends, digital economy, Brexit, and competitiveness of companies, cities, and nations. He holds a PhD from the European University Institute and was a visiting researcher at the London School of Economics, Warwick University, and INSEAD.
About the author
Contacts
Alexander Börsch Deloitte & Touche GmbHGermany+49 (0) 89290368689 [email protected]
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Eurozone: Economy shifting down a gear
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