Last updated: 12:12 / Thursday, 21 February 2013
Jacco de Winter

ING IM: Eurozone economy is set for a gradual recovery

ING IM: Eurozone economy is set for a gradual recovery

We see more evidence that the Eurozone economy is tentatively healing, although the emergence from recession will be a slow one. A stronger euro can derail a recovery, yet ECB President Draghi may be able to talk down the exchange rate.

The euro declined after Mario Draghi’s press conference last week. It remains to be seen however if he could again “talk the talk without having to walk the walk”.

Eurozone economy is slowly healing…

We see more confirmation that the Eurozone economy is slowly starting to heal this year. The substantial drags on growth exerted by credit and financial conditions on the one hand and austerity measures on the other, should abate somewhat while an improvement in global demand will have a positive effect on exports. The latest economic data broadly seem to confirm this view as both the composite purchasing managers’ index (PMI) as well as the EC economic sentiment index has increased for three consecutive months now.

…largely driven by Germany

Most of the improvement is driven by Germany. This was also confirmed by the IFO business climate index which rose for the third consecutive month from 102.4 to 104.2 in January. As a rule of thumb, three rises in the row in the past signalled a recovery which is set to continue. The rise was mainly driven by the expectations component which correlates well with German growth momentum and confirmed the strong upward trend that started towards the end of the summer of last year. All this suggests that Germany indeed benefits strongly from the pick-up in global growth given its diversified export base.

Recovery will be a slow one

Nevertheless, it is important to emphasize that the Eurozone’s emergence from recession will be a slow one. We should not forget that the Eurozone economy has always been like an oil tanker (i.e. turning slowly) and this time around this should hold to an even larger extent. The winds of peripheral deleveraging are still blowing and outside Germany unemployment rates remain on a rising trend which exerts downward pressure on the consumer.

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