Focus is increasingly turning to the weakness on euro data and the pessimists are getting new tailwind in the case that the euro area will be stuck in the mud for a long time and that the recovery was bound to be short-lived. This week, we look more into the recent slowing of the euro recovery and the factors behind it. It will be key for market performance whether the current slowdown is the beginning of a new long period of weakness or just a soft patch in a recovery that underneath the surface could be strengthening.
Euro recovery has slowed
The data flow out of the euro area recently has been clearly disappointing. While we did expect some slowing of euro area growth in Q2, the actual development has been even weaker. German orders fell for the second consecutive month in June and the OECD leading indicator is now declining for the first time since 2012. The German ZEW index fell for the seventh consecutive month in August and ifo business confidence has also been in decline since the beginning of the year.
Two things are worth highlighting about the recent slowdown: a) it is mainly indicators for the manufacturing sector that have slowed. Consumer demand continues to show strength as growth in retail sales rose to the highest level in seven years in June and consumer confidence has stayed at a fairly robust level, despite declining slightly in recent months; b) especially Germany has shown weakness whereas peripheral countries have been less affected (with Italy being the exception). GDP for Q2 in both Spain and Portugal rose 0.6% q/q, for example, whereas German GDP fell 0.2% q/q in Q2.
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