It’s morning again in Europe! Or something like that.
The past few weeks of economic data have started to get investors excited.
Three things stood out:
- Spanish retail sales. They’re rising at the fastest pace in 11 years, and the Spanish economy is growing faster than any other large eurozone nation. Previously, Spain was regarded as an economic wasteland.
- German growth. Just a few months after some analysts feared Germany would fall into recession, growth of 0.7% in the fourth quarter smashed expectations.
- Private lending. Companies and households in the eurozone are finally borrowing money again, a strong signal of confidence. They haven’t been in this territory for two and a half years.
Flows into European funds are at their highest level on record. The European Central Bank’s unexpectedly large QE programme helped to fuel that too.
Economists at BNP Paribas are now expecting 0.4% GDP growth in the first three months of this year, and 0.4-0.5% in the last two quarters of the year.
That sort of growth would push the eurozone back to its 2008 GDP levels at the end of 2015. It’s not amazing, but it’s twice as strong as 2014.
This is why:
Real compensation (mostly wages) is surging: It’s at the highest level since 2007, and higher than it was for most of the pre-crisis period.
As a result, household consumption is picking up too. The eurozone’s nascent recovery is being driven by consumers. According to BNP Paribas that boost in spending will account for “nearly all” of the short-term rise in growth, with plunging oil prices leaving people with more disposable income.
The deflation that the eurozone is seeing right now is undoubtedly a big problem if it sets in: It makes Europe’s debt problems even worse.
But there’s at least one big signal that isn’t going to happen. Money supply measures aren’t really in fashion any more, but here’s Oxford Economics with a chart of “M3.”
The money supply is a complicated way of describing a much more simple thing: The amount of money actually circulating in the economy. M3 is the broadest measure of this. In Europe, the figure is climbing at the fastest pace in a seven years, and it’s picking up pace:
In brief, this is what it means, from the guys at Oxford Economics (emphasis ours):
The stronger broad money growth — if it is maintained and even accelerated — implies that sustained deflation in the Eurozone (as opposed to a few months of negative inflation) is highly unlikely. Crucially, although the ECB’s QE should have some positive effect on broad money growth, the main impact has come before the Bank made its January announcement.
That’s a big deal.
The risk with deflation is that it starts feeding into other parts of the market. For example, with shop prices (and the cost of living generally) going down, a shop owner might decide to cut his staff’s wages.
They in turn have lower incomes, and there’s less demand, so those shop prices keep falling. If Oxford Economics are right, that’s not looking at all likely.
So growth is picking up, lending is picking up, and it looks like deflation won’t set in semi-permanently, like it did in Japan. However, it’s not all joy.
Of course, 0.7% growth in Spain and real wage growth doesn’t mean a lot to the fifth of the workforce that can’t find employment. But it’s a decent signal that the direction of the economy has changed, even if the level of output is still very depressed.
What’s more, BNP Paribas now thinks the potential negative risks are balanced by the positives: The euro is falling, which should help exporters, employment growth picked up a little towards the end of 2014, QE will offer a boost and the governments that began reforms some years ago (like Spain) are now seeing the benefits.
Falling oil prices are the story right now, but this should not be a blip.
A lot of people made a major mistake when the US and UK recoveries began.
After years of stagnation and recession, people couldn’t bring themselves to believe the hype. But if there’s smoke, there’s probably fire, and the eurozone looks like it’s currently beginning a modest upturn to me.