A trader works on the floor of the New York Stock Exchange shortly before the closing bell, June 29, 2015. U.S. stocks fell sharply in heavy trading on Monday and the S&P 500 and the Dow had their worst day since October after a collapse in Greek bailout talks intensified fears that the country could be the first to exit the euro zone.
Lucas Jackson | Reuters
The euro zone could be at a “turning point” for economic activity, according to HSBC, with disappointing growth remaining despite survey optimism.
Euro zone GDP (gross domestic product) growth surprised markets to the downside in the fourth quarter, rising by just 0.1% to post its slowest pace of growth in almost seven years.
On the individual level, the French and Italian economies contracted in the fourth quarter, and HSBC Senior European Economist Fabio Balboni suggested in a note Thursday that with growth so weak, this was further evidence that it “does not take much to knock the euro zone into contraction.”
German manufacturing has continued to weigh, and industrial production figures out of Europe’s largest economy sharply disappointed, coming in at -3.5% against +0.1% market expectations. The services sector has also shown signs of slippage.
However, survey data has begun to strengthen so far in 2020, with manufacturing PMI (purchasing managers’ index) readings and economic sentiment indexes looking up.
Balboni highlighted German wage growth hitting a 20-year high and unemployment fears across the bloc remaining broadly low, suggesting that in combination with “mildly expansionary fiscal stances geared towards consumers,” this could support consumption.
However, with a multitude of downside risks remaining and loose central bank monetary policy running out of steam, any unpleasant surprises to the survey indications of gradually improving growth momentum could be profound.
Downside risks remain
“Investment has held up in the euro zone, albeit with France taking the baton from Germany but a sluggish global environment and easing capacity constraints point to possible weakness ahead,” Balboni said.
The latest lending survey from the European Central Bank (ECB) indicated a fall in demand for loans, in particular those intended for investment purposes. While financial conditions have eased in the ECB’s ultra-low interest rate environment, Balboni said loan growth to firms appears to have peaked, even in Germany and France.
Analysts and financiers have long been warning of the diminishing utility of the ultra-loose monetary policy stance from the ECB.
“While the manufacturing sector is showing signs of bottoming out, a V-shaped recovery seems unlikely and there are still significant risks, from U.S. tariffs to possible trade disruptions following Brexit.”
What’s more, the ongoing coronavirus outbreak offers further dangers to the German economy, as the main export partner of China.
‘Expect little’ from the ECB review
Headline inflation has begun to pick up slightly, which Balboni attributed to base effects from energy and recent euro weakness, but he projected that this could recede given the recent fall in oil prices. Core inflation meanwhile remains subdued, falling back toward the 1% mark in January, well short of the ECB’s target of close to 2%.
“Market expectations in terms of ECB monetary policy have shifted markedly from last September, from pricing another 20bps (basis points) of rate cuts to broadly flat, moving towards our own view of no more cuts,” Balboni said.
“Against the backdrop of sluggish growth and disappointing inflation, we think that — also wary of past mistakes — the ECB will be in no rush to make a hawkish turn to its monetary policy stance, and expect little from the upcoming strategic review.”