Global weakness dents eurozone economic stability ahead of Q3 GDP
The eurozone is the world’s second largest economy, and it includes 19 member states. The biggest of these by percentage of total GDP are Spain (11%), Italy (16%), France (21%) and Germany (29%). On Friday 13 November at 10am GMT, the first estimate of Q3 eurozone GDP will be released. Given the current state of the global economy, analysts will be watching this metric carefully for signs of an uptick or a slowdown in economic performance.
During Q1 2015, eurozone GDP grew at an annual rate of 1.2%, followed by Q2 GDP growth of 1.5%. The consensus estimate for Q3 GDP growth is 1.7%, and if this proves correct it will calm anxiety across Europe. Per quarter, GDP grew by 0.5% in Q1 2015 and 0.4% in Q2 2015, and the estimate for Q3 is 0.4%, which again would help to stabilise concerns.
Any fall below this level might impact on the euro, European equities and global sentiment. Eurozone GDP per capita increased between 2013 and 2014 from $32,652.47 to $32,789.48. As a marker of the economic health of the eurozone, eurozone GDP is 260% greater than the average global GDP.
Policymakers deeply concerned about China
Concerns remain however about the state of the global economy, especially China. Chinese imports slumped by a record 20.4% year-on-year in September 2015 and 18.8% year-on-year in October 2014. This data confirms the weakening of the Chinese economy and the domino effect this is having on emerging market and developed countries alike. The consensus estimate for October imports was -16.0%, so the actual figure was that much more disappointing to global investors.
The range of factors affecting global economic sentiment is not limited to China. There are concerns about growing geopolitical tensions in the Middle East, with Israel, Syria, Iraq and Iran. There is also ongoing stress about Russian and American involvement in Syria, as well as the negative impact of weak commodity prices on BRICS countries in particular.
The European Union has a lot to contend with right now, given the UK government’s attempts to impose its list of demands on the EU ahead of the 2017 referendum, which could ultimately lead to the UK’s exit from the EU. The Bank of England recently declined a rate cut, owing to economic weakness in the UK and fears of a China slowdown.
EU contending with problems on multiple fronts
All these factors are weighing on the European Central Bank. Indeed ECB President Mario Draghi has hinted at expanding the monetary stimulus policy at the next meeting of the ECB in December. Already, €1.1 trillion in bond purchases have been made, but Draghi is prepared to step this up to accelerate the velocity flow of money through the EU and help the recovery.
Disinflation is a real concern in the EU where energy prices and commodity prices in general are keeping the inflation rate at unusually low levels. Across the Atlantic, the Fed is all but ready for lift-off with the first Fed rate hike since 2008 expected on December 16 when the FOMC meets. This will cause further weakness in the EUR/USD exchange rate, hurting European imports and assisting European exports.
There are many social and economic issues being brought to bear on the eurozone, including the deepening refugee crisis from Syria, Iraq and neighbouring states. The socioeconomic burden of accepting millions of refugees is adding tremendous pressure onto an already fragile economic recovery. For the present year, an estimated 1 million refugees will be making their way into European nations, largely Germany and France.
Of course, concerns about the Greek debt crisis remain front-and-centre with the International Monetary Fund, the EU, the ECB and the European Commission. Greek GDP is expected to contract by 1.4% in 2015 and 1.3% in 2016.
How should traders react to the EU situation?
The global economy is currently in a precarious predicament, as evidenced by the recent Chinese imports data. Commodity prices continue to slide on the back of China weakness, and this is clearly impacting on the profitability, employment prospects and export potential of emerging market economies. With a potential monetary easing stimulus being injected into the eurozone in December, coupled with an equal but opposite monetary tightening measure by the Fed in December, we could see some really interesting developments.
For starters, US equities are likely to contract as the US dollar strengthens and interest rates rise. This will lead to capital flight from emerging market countries which will further accelerate the decline in performance of their economies and currencies. The US dollar index is likely to spike above its 52-week high before the end of the year.
In the eurozone a stronger US dollar will move the euro to its weakest levels against the greenback. This will be accelerated by any monetary stimulus measures being adopted by the ECB at its next meeting. Millions of migrants flooding into eurozone countries will only weaken sentiment further, at least in the short-to-medium term. Traders will be looking towards call options on the US dollar, shifting money from equities to two-year Treasury notes, and pulling investments away from gold into fixed interest-bearing securities.
The overall effect on Brazil, Russia, India, South Africa, China and other emerging market economies will be negative. Crude oil prices will initially rise as more producers enter the markets, but then fall as oversupply and lack of demand causes a contraction in the oil markets. Until crude oil prices start to rise due to increasing demand, the effect of this commodity on EU inflation will be negative.
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