The Eurozone’s sustainable recovery
Eurozone retail sales registered their first month-onmonth fall in five months in February, prompting fears that Europe’s consumer-driven revival may be faltering.
Since last May the price of oil has fallen -32% in euro terms, lifting real wages by 2% and boosting consumer purchasing power across the eurozone. Over the last three months, however, oil has rebounded 22% from its January low, eroding some of the European consumer’s purchasing power gains.
Happily, there are several reasons to believe the recovery will continue.
Eurozone money supply is now expanding rapidly.
The M3 broad money measure grew at its fastest pace since April 2009 in February. Admittedly, M3 on its own is not the most reliable indicator of reflation in action.
A better guide is the inflation-adjusted M3 gap—the difference between the M3 stock of money and the trend level of M3 stock. In recent months this gap has begun to close for the first time since 2011, indicating that disinflationary pressures have abated.
The rise in M3 has been propelled partly by aggressive European Central Bank policymaking even before quantitative easing kicked off last month, partly by the eurozone’s current account surplus, and partly an emerging recovery in lending to the private sector—notably in Germany—now that banks have deleveraged and recapitalized.
However, a breakdown of eurozone money supply also shows encouraging signs. With yields on time deposits unattractive thanks to the ECB’s ultra-loose policy, consumers and businesses have been shifting money out of fixed term accounts and into demand deposits. The upshot is a rapid increase in the amount of liquid cash in the system that can be called on immediately to fund either consumption or investment—usually a signal of gathering reflationary pressure.
is picking up in Germany.
The German construction PMI recorded its second consecutive monthly expansion yesterday to 53.3. New construction orders rose for the first time in three years, while suppliers’ delivery times deteriorated as they struggled to keep up with rising demand and input cost inflation rose to a three-month high.
As a result, the 12-month outlook is the most optimistic for more than four years. Construction is strong across all three sectors of the market, but housing is the best performer, suggesting that the health of demand for new homes will support German consumer spending.
Italian investment sank to its lowest level for more than 20 years in 4Q14. Now however, there are signs that things are changing. In March, business confidence—a leading indicator for investment— hit its highest level since June 2008. Meanwhile, the weak euro is attracting international investors to Italy. ChemChina’s headline-grabbing purchase of Pirelli last month was no one-off deal. According to data compiled by Bloomberg, China has spent US$14 bln on acquisitions in Italy over the last 12 months, more than in either the US or the UK.
Cheaper oil, monetary policymaking that is now firmly ahead of the curve, greater confidence in the eurozone’s banking system following last year’s Asset Quality Review, emerging loan demand, and a long-awaited pick-up in German consumer demand should all combine to create a sustainable acceleration in the eurozone economy. A major rebound in the oil price could still scupper the recovery, but that looks improbable.
Despite the strong rally in eurozone stocks so far this year,
in US dollar terms the MSCI EMU index is still close to the bottom of its 20-year trading range against the MSCI US. Given the eurozone’s positive fundamentals, we recommend that global investors continue to maintain unhedged overweight positions in eurozone stocks versus the US.