Tuesday, March 20, 2012

A Eurozone recovery is in sight


This chart of U.S. and Eurozone industrial production shows the huge divergence in economic activity that has opened up in the past several months between the U.S. and Europe. From the looks of this chart, the Eurozone economy has probably been in the grips of a modest recession since last September, no doubt sparked by the financial turmoil created by the Eurozone sovereign debt crisis. 

In any case, the behavior of swap spreads—a reliable indicator of systemic risk and a good leading indicator of economic behavior—suggests that the financial strains which have slowed the Eurozone economy have diminished significantly this year. That points to a Eurozone recovery that should be getting underway soon, if not already.



The first of the above two charts tracks German business confidence, and it is noteworthy that it has turned up in the first two months of this year after a sharp contraction which paralleled the decline in Eurozone industrial production. The second chart measures German Industrial Production, and here too we see emerging signs of what could prove to be a bottom.


Finally, I note that the Euro Stoxx Index has turned up, albeit quite modestly. Stocks typically are able to sniff out recoveries before they officially happen (e.g., the U.S. equity market turned up about 3 months prior to the mid-2009 recovery started), and there's no reason to think that isn't the case today. The Eurozone recovery is likely to be a modest one, however, because Europe is still burdened by excessive government spending. Nevertheless, progress is being made, and simply halting the growth in spending ought to be enough to improve sentiment and, in turn, growth.

4 comments:

Luis H Arroyo said...

You are completly misguided. Spain will contract about 2% in 2012, also Italy, probably. Greece is a desert. Ther will be a rescue of Portugal. How can you say that Europe is recovering?

Hans said...

I agree, Mr Arroyo, that the author's optimism has overcome his better judgement..

Ireland, UK have their own set of problems and not to mention Rome..

I am sorry, but to suggest that the EuroCrisis is over, is IMHO, rather myopic..

Unknown said...

"The Eurozone recovery is likely to be a modest one, however, because Europe is still burdened by excessive government spending. Nevertheless, progress is being made, and simply halting the growth in spending ought to be enough to improve sentiment and, in turn, growth."

Improve Sentiment? Still believing in the confidence fairy are we?

Thanks largely to Obama, the US has not pursued the austerity path of many European countries and hence our economy is on the rebound while much of Europe continues to falter.

Unknown said...

I meant to add this link which discusses Italy, Spain, Portugal and Ireland

http://hosted.ap.org/dynamic/stories/E/EU_EUROPE_BAILOUTS_AFTER_GREECE?SITE=AP&SECTION=HOME&TEMPLATE=DEFAULT&CTIME=2012-03-22-12-05-55
---snip---
"Economists seeking a more relevant picture of Ireland's economic health dismiss GDP - which includes the multinationals' expatriated money - and use a different yardstick: gross national product. And Irish GNP kept dropping in 2011 and is forecast to fall further this year in line with emigration, small business closures, and a property market still searching for the bottom.

Ireland is not a success story for austerity. Its underlying numbers are dire," Tilford said. "If any country can dig itself out, it's going to be Ireland, but at what cost?"