The Consumer-Led Upswing In The Eurozone Is Resisting Routs Abroad

The latest economic indicators confirm that the eurozone’s upswing, although not spectacular, remains on track, thanks to resilient consumer demand and intra-European exports.

The latest indicators are converging to suggest that the pickup in the eurozone economy gathered momentum at the end of 2015, Standard & Poor’s said in the report “The Consumer-Led Eurozone Upswing Is Resisting Routs Abroad.”

Business and consumer confidence rose to its highest level since April 2011, according to the European Commission’s (EC’s) latest Economic Sentiment Indicator. The rise was consistent with the surge in the composite PMI (Purchasing Managers’ Index) recorded for that same month.

“Judging from past historical correlations, the increase in the EC index translates into fourth-quarter GDP growth of about an annualized 2%, up from 1.6% in the third quarter,” said Jean-Michel Six, Standard & Poor’s chief economist for Europe, the Middle East, and Africa. “Equally positive, the improvement seems broad, crossing sectors, with the industrial index pointing to a pickup in production growth, and the service sector index appearing consistent with a robust 2.5% annual increase in activity.”

Meanwhile, Eurostat reported that unemployment fell to 10.5% in November from 10.6% a month earlier. The dip may look modest, but it brings the jobless rate to its lowest level in four years.

Credit growth in the eurozone continued to gain momentum in November, following a temporary setback in September. New loans to the private sector increased by €18 billion, displaying one of the largest monthly gains in four years. Loans to the private sector (adjusted for sales and securitization) increased by 1.3% in the 12 months to November, up from 1.0% in October.
Although still modest by historical standards, the trajectory is clearly pointing to further improvement.

These indicators confirm that the eurozone’s upswing, although not spectacular, remains on track, thanks to resilient consumer demand and intra-European exports. Ultralow interest rates and slashed energy costs go a long way in explaining this resilience.

To be sure, economic and monetary conditions beyond the eurozone are presenting risks to the sustainability of this recovery. The collapse in commodity prices is now at a point where the prospects for demand from emerging markets appear bleak. Plus, growing uncertainties about China’s medium-term growth prospects are weighing on financial markets, illustrated once again by this past week’s rout on global stock markets.

These developments are bound to influence investment decisions in the corporate sector in Europe. The lack of visibility regarding the economic outlook could delay or even reverse a pickup in capital formation.

“The transmission of the economic impulse from stronger consumer demand to an increase in investment is key to the longer-term sustainability of the eurozone’s recovery. In other words, a growing loss of confidence in global economic conditions could bring the recovery to an early end,” said Mr. Six.

We have determined, based solely on the developments described herein, that no rating actions are currently warranted. Only a rating committee may determine a rating action and, as these developments were not viewed as material to the ratings, neither they nor this report were reviewed by a rating committee.