The economic picture for the Eurozone is fuzzy at best. On the surface, certain metrics offer a glimmer of hope. The inflation rate is below 3%, and the unemployment rate is at lows. These indicators might typically signal a robust economy, potentially eliminating the possibility of an imminent recession.
The problem is that several other economic data points point to more worrying dynamics.
For example, both the services and manufacturing sectors are showing PMI readings that suggest contraction. These indices have been persistently low for several months, indicating a protracted period of economic downturn in these crucial sectors.
Why the Eurozone Is in Trouble
It’s not just service and manufacturing, though. The latest data from November shows negative growth in retail sales, with Germany exhibiting pronounced weakness. Only three months in the last year have demonstrated positive growth, painting a stark picture of consumer confidence and spending habits.
We’ve been told for some time that international investing helps an overall portfolio, but can it when there are so many conflicting economic signals? The Eurozone’s flat GDP growth signifies stagnancy, while inflation rates trending below 2% on a short-term annualized basis might usually prompt a dovish monetary policy response.
Mario Centeno, an ECB governing council member, has recently vocalized the need for more immediate action, suggesting that the central bank should not procrastinate until May to adjust its policy. Centeno’s advocacy for prompt intervention aligns with the economic signals that call for swift and decisive action. The ECB, like the Fed, likely overtightened relative to the lags of monetary policy.
Despite Centeno’s position, I fear that the ECB’s traditional slow response could be steering the Eurozone toward economic contraction. Yes, I do believe Europe could outperform U.S. markets this year, but that could just mean being down less if an economic recession takes hold. The necessary monetary easing, which some argue is overdue, is likely to be delayed and its effects not felt until late 2024 due to the inherent lag associated with monetary policy implementation and its subsequent impact on the economy.
The Bottom Line
Hence the problem for asset allocators here. With PMI levels indicating persistent contraction and retail sales dwindling, investors cannot dismiss the likelihood of a recession. While the labor market remains resilient for now, it typically lags other economic indicators and may not reflect the immediate challenges faced by the Eurozone economy.
The Eurozone stands at a crossroads, with mixed economic signals complicating the ECB’s policy decisions. While certain indicators point toward economic stability, others foreshadow potential recessionary trends. The ECB’s historical tendency to move cautiously may need to be tempered with a more proactive stance as advocated by Mario Centeno, to avoid deepening the economic slowdown.
This will matter for the global economy and risk sentiment, which means U.S. investors looking to diversify abroad may have a challenging time getting the timing just right.
On the date of publication, Michael Gayed did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
