The Eurozone’s economy as measured by GDP expanded by 2% q/q in the second quarter, significantly faster than expected, indeed faster than the economies of the US and China. However, Eurozone GDP was still 3% lower than its pre-pandemic high, while US second-quarter GDP was 0.8% higher. The HIS Markit Eurozone Flash PMI Composite Output Index for July reached a 21-year high, signaling that strong growth is likely to continue at least through the summer. Rising COVID-19 infections, with the dangerous Delta variant soon to account for 90% of new cases, present the main risk to the continuation of this recovery in the fall and next year.
The biggest economies in the Eurozone all registered strong growth in the second quarter, with Italy’s 2.7% and Spain’s 2.8% q/q advances being impressive. Germany’s 1.5% and France’s 0.9% q/q advances were more modest. Consumption demand powered the economies in the quarter as widespread economic reopening finally permitted consumers to start spending the massive amounts of excess savings they had accumulated. It is not surprising that with the economic reopenings the increases on the production side were led by services. Supply shortages for production inputs such as semiconductors, metals, and plastics, coupled with bottlenecks in container shipping, have restricted growth in the manufacturing sectors of many Eurozone countries. This has been the case particularly for German manufacturers, who have not been able to fully meet strong global demand for their products.
Early economic indicator data contained in the Flash PMI for July provides some details about the growth trends noted above. The survey’s suppliers’ delivery times index lengthened at one of the sharpest rates ever recorded. Delivery delays drove manufacturers’ input prices higher, which led to a near-record increase in average selling prices for goods and services. It looks likely that consumer price inflation, which the July Flash inflation report estimated at 2.2% y/y, will increase further in the second half and then ease somewhat next year.
The most important driver of the Flash Composite PMI for July was the Flash Eurozone Services PMI Activity Index, which registered the strongest rise in 15 years. In contrast, manufacturing output growth slowed, due mainly to worsening supply lines and rising backlogs, but still registered a very strong rate of expansion. Based on a positive growth outlook, new-order growth accelerated in July.
Despite the current growth spurt, business optimism about the year ahead peaked in June and then tumbled to the lowest level since February. Supply chain delays are one of the main concerns. But growing worries about the Delta variant of COVID-19, with infections rising across Europe, appear to be the greatest risk affecting business optimism. Some COVID restrictions have been reintroduced, which have affected consumer and business attitudes. However, it seems unlikely that a reintroduction of economically crippling lockdowns will be needed. Reasons for optimism on this point include the acceleration in vaccinations after a slow start, with 70% of European adults having received at least one shot and more than half now being fully vaccinated. Also, hospitalizations have not increased in line with infection numbers. Yet the future course of this disease in Europe remains unknown. The travel, hotel, and entertainment sectors face the greatest risks.
Investors in the Eurozone have generally maintained a positive attitude consistent with the outlook for the economies and corporate earnings. The EUROSTOXX 50, a blue-chip index for the Eurozone, gained 3.5% in July and 16.1% for the year to date on a total-return basis. This compares with returns for the S&P 500 of 5.12% and 17.02%, respectively. The returns for the markets of the four largest economies are Germany’s DAX, 2.7% and 13.31%; France’s CAC 40, 5.48% and 19.12%; Italy’s FTSE MIB, 5.06% and 14.08%; and Spain’s IBEX 35, -1.58% and 7.46%. We continue to maintain our Eurozone positions along with UK, Sweden, and Switzerland positions in our International and Global Equity ETF Portfolios. We are giving particular attention to the pandemic in our monitoring of developments.
Bill Witherell
Chief Global Economist
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Sources: Financial Times, Oxford Economics, HIS Markit, Goldman Sachs Economic Research, CNBC
