Warning signals for economy in Euro area

The economy in the Euro area is entering ever choppier waters. DZ BANK’s Euro Indicator, a leading indicator for the currency area’s economy, ended 2018 on a weak note at a rate of -0.4 per cent in December (month-on-month). The indicator thus lost around 2.5 percentage points overall in the course of 2018. This is the weakest annual result since the Euro crisis in 2011.

Last month there was downbeat news from virtually all areas that are included in the calculation of the Euro Indicator. In the industrial sector, for example, the key figures deteriorated further. The production forecasts in the manufacturing industry fell in December to the lowest level for more than two years. Nevertheless, they are still above the long-term average and are significantly higher than in earlier phases of recession. The purchasing managers‘ survey in the industrial sector painted a similar picture: The mood indicator slid to its lowest level for 33 months, but still indicates slight growth.

The barometer for consumer confidence turned from “high” to “variable” in the course of 2018. In January last year the reading had risen to the highest level since the year 2000, and finally in December it reached the lowest level for almost two years. The steepest fall has recently been charted by the consumer expectations. Above all the many negative political factors and risks are probably souring consumer sentiment. The appetite for big-ticket purchases has thus declined significantly. The index reading recently fell to the lowest level for almost four years.

There was also bad news from the financial markets in December. Share prices fell significantly. The MSCI-Index for stocks in the Euro area lost a good four per cent averaged out over the month and closed at the lowest level since the end of 2016. Bund yields continued the downtrend of the last few months, also coming near to the levels seen at the end of 2016. As a result, the difference between capital market yields and the money market rate has narrowed further, which is usually interpreted as a negative sign for the economy.

Only the decline in the inflation rate has delivered a positive signal recently. Together with poorer money supply growth it was responsible for a steeper increase in the real money supply. However, overall the outlook for the EMU economy in the next one to two quarters is still bleak.

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