A Recovering Eurozone Economy: Where Should You Position?

Amid the recent global financial market turmoil, both the European Central Bank (ECB) and the International Monetary Fund (IMF) have downplayed the near-term economic recovery in the Eurozone

This will no doubt have dented investors’ confidence, especially in the wake of the accommodative monetary policies being implemented by the ECB. However, despite the downward revisions in GDP for the Eurozone, growth prospects remain strong, driven predominantly by exports and resurgent domestic demand.

Domestic Growth Is Expected to Strengthen Further
Whilst net exports have been a key driver for growth in the Eurozone over the past few years, domestic demand, namely household consumption, has played an increasingly important part in the Eurozone recovery.

Confidence is a key to economic growth. At WisdomTree, we closely watch the European Commission Economic Sentiment Indicator, which is a timely composite measure of business and consumer confidence in the region. Historically, it has been a reliable leading indicator for the region’s economic activities. As illustrated in the figure below, it leads the Eurozone nominal private consumption expenditure growth quite well. The increased confidence has been a tailwind to consumption growth, and the latest readings suggest that the trend might continue.

This growth is further supported by the ECB’s monetary easing and some of the monetary indicators that we follow, such as M1, imply continued support for this trend.