Just what is the state of the European economy today?
The EU accounts for about 35 per cent of our exports and decides our interest rates, so it’s an important question.
Mid-2021, there was a degree of optimism in the EU given what seemed to be a robust re-opening, especially as regards travel restrictions and protocols. The OECD pushed up its view on the Euro economy between its mid-year and end of year review. In December the OECD forecasters were looking at 5.2 per cent growth in 2021 and a robust 4.3 per cent in 2022, broadly mirroring its benign global view.
Then came Omicron.
Governments in Europe have been active in implementing restrictions. For most of 2021, European economies had been among the more open of the major world economies in terms of factors like school openings, transport restrictions, reduced public gatherings etc. This can be measured by the Oxford Stringency Index. Omicron has changed this, and in the past month, countries such as Germany, France and Italy now dominate the top half of the stringency table. There have been frequent public demonstrations against these moves.
Omicron has put a dent in the global economic picture. While it may be medically less severe, its high transmissibility, together with the need for contacts to isolate, mean it can compound supply side constraints. Looking at the Citi economic surprise index we can see a lot of recent global economic data has fallen short of estimates. In the US, the most recent data shows that the jobs market continues to disappoint. And in the past few weeks we have also seen US stock-broking analysts making more negative than positive revisions to their company profit forecasts, for the first time since early 2020.
And where government policy has been most restrictive, economic disappointment has followed.
European economists have been cutting their numbers and are likely to continue to do so. For the first quarter of 2022, estimates have been halved from 0.8 per cent as forecast last October to 0.4 per cent today. This is probably still not coming through in hard data as there is typically a lag. But there is clear flat-lining visible in softer data. The European PMI index for November, which is a forward looking measure of business confidence, came in below expectations, with Germany showing the weakest trend. This is the weakest it has been since May 2021.
Consumer confidence which has been on a downward path since October continues to edge lower. In addition to any Covid fears, higher energy costs (up 26 per cent in 2021) act as a further drag on the consumer mindset. Higher frequency data such as cinema and restaurant bookings have also collapsed, reflecting the targeted government policy.
While we have seen evidence of a pick-up in summer holiday bookings very recently, the winter tourism season has essentially melted. Travel restrictions and uncertainty play a huge role here, as approximately 75 per cent of Alpine visitors are international. For countries such as France and Italy, this lack of the winter season is estimated to knock about 0.5 per cent off economic growth.
When investors and analysts look to Europe it is usually around the topics of inflation, interest rates or geo-political risks to the east, but it is also clear that the rigour of many of the virus-suppression policies is having an impact on near term growth prospects, which may be garnering less attention. For example there was little mention of growth in the recent Philip Lane, ECB chief economist, RTÉ interview.
To the extent that demand is an input to our inflation outcome that pressure is receding and supporting the policymakers’ view of inflation peaking.
The next few months are critical in assessing the European economic direction. There is room for increased uncertainty around policy, given elections in France, Italy and a relatively fresh administration in Germany.
January’s inflation figures need to be watched like a hawk for evidence of the removal of base effects and a more relaxed view on price appreciation.
There is also a need to forensically examine the macro-economic data to assess whether the loss of momentum in the softer higher frequency data, we are seeing today, becomes more entrenched.
Eugene Kiernan is an independent investment strategist and is president of the Chartered Institute for Securities and Investment