EU Economic Update – 03 November 2014

European data continues to disappoint

While European equity markets rose last week, driven higher by better than expected data from the US economy and further easing from the BOJ; economic numbers emerging from the continent’s core economies continued to disappoint.  

In detail, the German IFO survey marked its sixth straight month of decline for the month of October as business sentiment soured once again. This was while October preliminary CPI figures for the bloc’s largest economy showed inflation dipping further than expected below the zero line, with the actual figure coming in at -0.3% VS official forecasts for a reading of -0.1%.

In addition to weaker German prices, bloc wide inflation also continued further along a southward path for the month. While the headline rate for CPI underwent a minor bounce, the more telling Core CPI, which strips out volatile items such as food and energy, fell for the first time in four months during October.   

This was while several lagging survey measures highlighted a sharp contraction in both French consumer spending and German retail sales during September, erasing gains from the previous month and indicating that overall domestic demand at the core of Europe probably weakened during the third quarter.

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There is still life on the periphery

Despite the doom and gloom for the major economies, there were some positive indications of continued progress on the periphery. Most notably, figures released on Thursday showed Spanish GDP for the 3rd quarter expanding at a quarterly rate of 0.5%, and 1.6% on an annualised basis. The Italian economy also surprised markets when prelim CPI figures came in at +0.1% as opposed to the projected -0.1%.  

However, this and other small triumphs in some segments of the periphery will not be enough to prop up the rest of the bloc when it comes to full year growth numbers.

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Looking ahead

While low inflation or deflation across the bloc should improve real output figures in some areas, the proximity of Europe’s two major economies to both deflation and recession is likely to weigh on investor sentiment going into the new year.

Although this should see pressure remaining upon the ECB to do more, the likelihood of any meaningful intervention this side of Christmas has reduced substantially in recent months.  

Nevertheless, with growth in the US during the 3rd quarter reported ahead of estimates at 3.5%, the UK economy on track for a strong finish and now with growth in China appearing to slow at a lesser rate than expected; investors seem to have turned cautiously optimistic over the last fortnight.

Save for any major surprises to the downside, this could help to support European equities into the close of the year.

However, if bloc wide inflation continues to trend downwards in the new year, while the continent’s core economies remain close to the rocks; investors could soon lose patience with the ECB.

A worst case scenario outcome here could see volatility return to both equity and bond markets across the bloc.      

EU Indices – DAX (Black), CAC40 (Red), IBEX (Blue)

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