Eurozone: Looking for the trough

European stock markets have been rallying in October in the hope that some of the outside risks are diminishing and a turnaround in activity is around the corner. That said, the eurocoin indicator- a nowcasting tool for the eurozone, fell from 0.16 in September to 0.13 in October, continuing its downward trend.

The forward-looking indicators in the European Commission’s business and consumer survey don’t signal an imminent turnaround in the weakening trend either. Especially the manufacturing sector continues to suffer, with both the order books and the employment expectations component further declining. The falling capacity utilisation doesn’t bode well for business investment and it is clear that as long as there is not more certainty in terms of the trade war and Brexit, businesses will be reluctant to initiate new projects.

The bad news is that services are also beginning to feel some impact of the slowdown in manufacturing, with the sentiment indicator now below its long-term average. But on the positive side, it must be noted that hiring intentions are still holding up. And that is important, as a strong labour market is supporting private consumption. The unemployment rate was unchanged at 7.5% in September, still the lowest level since July 2008. But consumer confidence is of course also important and here things start to look a bit shaky, too. Consumer confidence fell in October to the lowest point since December 2018 and is now also below its long term average.

Since the summer, households have started to become more concerned about the labour market. No wonder that the savings ratio has been creeping up and without any confidence-boosting event this trend is likely to continue, putting a brake on consumption growth. On the other hand, construction activity still seems to be holding up well, boosted by the very low level of interest rates. Both order books and employment perspectives actually went up in October in the construction sector.

The new ECB-president Christine Lagarde called upon countries, that have room for manoeuvre, to use their budget surpluses to fund public investments. While the Netherlands has already put in stimulus in the 2020 budget, the German government is unlikely to contemplate more stimulus, as long as there is no significant deterioration in the labour market. To be sure, the first signs that employment growth is over the top are popping up, but we might already be well advanced into 2020 before the German government decides on more stimulus.

We still believe that the current downturn will not degenerate into an outright recession. The combination of easy monetary policy and some fiscal stimulus, together with a trade truce and a clean Brexit, will support a cyclical improvement in the course of 2020. Not enough to lift growth above 1% though (we expect 0.7%) and given the importance of an improvement in terms political uncertainty, the risks to the outlook are still downward.