LONDON – It’s not ideal timing. Just as the eurozone economy finally appears to be picking up speed, its future is clouded by concerns over China and the world economy.
The gyrations in Chinese financial markets this week have been stoked by worries over the scale of the slowdown in the world’s number 2 economy, leading investors to scale back expectations for global growth this year.
China’s turmoil is a threat the 19-country eurozone could do without. The health of its trading partners is crucial for the region, which spreads from Ireland in the northwest to Cyprus in the southeast. China has been a key buyer of European goods and services over the past few years. Without China, the eurozone would have suffered even more than it did during its debt crisis of the past six years.
On the plus side, the eurozone is in a better place than it has been for years. Growth is solid, unemployment is falling and — whisper it quietly — concern that Greece might fall out of the euro has dropped off the radar.
A series of reports on the eurozone economy this week have provided a clearer picture of a region on the mend — the global economy permitting.
The transition to 2016 has been marked by positive economic data that has raised hopes of a more buoyant economic recovery.
In the two and a half years since the eurozone recovered from its longest-ever recession, growth has been tepid, and that’s kept unemployment high. In 2015, growth picked up to a quarterly rate of between 0.3 per cent and 0.5 per cent. That’s still not enough to quickly generate more jobs.
Now, there are indications of a step-change.
On Wednesday, a survey of the manufacturing and services sectors by financial information company Markit showed growth in the fourth quarter running at its highest level in 4-1/2 years. Its chief economist, Chris Williamson, said the region is “well placed to enjoy a year of robust expansion” and noted that many firms are set to take on staff in increasing numbers.
Similarly good news came Thursday from the European Commission, the EU’s executive arm, which said its economic sentiment indicator for the region is also running at a 4-1/2 year-high. And the EU’s statistics agency found that unemployment across the eurozone fell by 130,000 in November to below 17 million for the first time in four years. There’s still a long way to go, though: the jobless rate stands at 10.5 per cent, around double the rate in the United States.
NOT ALL IT SEEMS
The worry would be if the eurozone weren’t showing signs of improvement. After all, it has enjoyed strong tail winds in recent months. Sliding oil and commodity costs have given consumers and businesses more to spend while the lower euro has been a boon to exporters. And the European Central Bank has embarked on a monetary stimulus program that is designed to keep a lid on borrowing rates.
Whether those advantages continue this year will largely determine whether burgeoning optimism in the eurozone translates to higher growth.
One disappointing point is that retail sales have dipped modestly for three straight months through November. That’s been a surprise, given that consumers’ disposable incomes have been swelled by lower prices at the pump.
It could be that low inflation rates are beginning to affect spending. The great fear at the European Central Bank is that the current era of low, and sometimes negative, inflation rates turns into a debilitating bout of deflation — when consumers start putting off spending in the expectation of lower prices in the future. That’s what happened in Japan, whose economy stagnated for two decades.
Despite efforts to integrate, the eurozone remains a patchwork of economies operating at differing speeds. Germany is still the powerhouse economy regardless of what the Volkswagen emissions scandal might have done to its reputation. And former debt laggards, Ireland and Spain, are going great guns. Even Italy appears to be healing.
But Greece looks like it’s headed for recession again as strict controls on money flows take their toll — withdrawals at ATMs, for example, have been limited for more than six months. And France, the eurozone’s second-largest economy, is stalling, with sentiment likely undermined by November’s attacks in Paris that killed 130 people.
The big worry stalking financial markets everywhere is what’s happening in China. Trading on the main Shanghai stock index has been halted twice this week after sharp declines triggered emergency “circuit breakers.”
Investors around the world are asking the same questions. Can China’s economy avoid a crash as it slows down from the heady growth rates of previous years? Can the country’s leaders succeed in shifting the economy’s focus from industrial production to consumption?
Answers to these questions will likely determine whether the high hopes in the eurozone this week become another false dawn.