Eurozone growth driven by services, weighed down by industry slump

The difficulties of German industry weigh particularly heavily on the European economy. The productive apparatus of the leading European economy is struggling to emerge from its slump despite a meagre unemployment rate.

While the eurozone’s private sector stagnated until December 2019, the manufacturing sector has seen more of a prolonged slump. It is the services sector that continues to drive the eurozone’s growth. EURACTIV’s partner La Tribune reports.

The European economy remains at a standstill.

According to the latest Markit composite indicator published on Monday (6 January), the eurozone’s growth still disappointed by the end of 2019. The final composite index went from 50.6 in November to 50.9 in December.

On 16 December, Markit announced that the index would stagnate at 50.6, knowing that activity increases whenever the PMI is above the 50 point threshold, while it decreases whenever it is below.

In other words, the global information provider, therefore, revised upwards its first estimate. But despite this slight acceleration, this level remains among the lowest in six years. According to Chris Williamson, chief economist at IHS Markit, the sluggishness of activity will be confirmed in the last quarter of 2019.

“The latest composite PMI data, which again showed weak growth in December, highlights the weakest quarter since 2013 in terms of economic performance in the single currency zone and suggests that the region’s quarterly GDP will rise by just 0.1% in the final quarter of 2019,” Williamson said.

On the international scene, the situation is far from being resolved. While the United States and China are due to sign a preliminary agreement in the next few days and Brexit is expected to take shape at the end of January, the eurozone’s relations with the US and the Middle East are being tested following the killing of Iran’s General Soleimani last week.

Eurozone 2020: The race against the clouds

After seven years of growth, the eurozone’s outlook is deteriorating. There is a risk of a recession if the trade war with Washington worsens, while member states continue to disagree over the completion of the economic and monetary union that would help them cope with a downturn.

The industry is experiencing its biggest downturn in seven years

The situation of Europe’s industrial engine is particularly worrying. The firms’ latest results indicate that manufacturing output has recorded its “strongest decline in almost seven years”.

Last week, the Markit said the manufacturing sector finished the year on a feeble note. “The latest data thus prefigures a decline in industrial production of about 1.5% in the fourth quarter,” the press release said.

The difficulties of German industry weigh particularly heavily on the European economy. The productive apparatus of the leading European economy is struggling to emerge from its slump despite a meagre unemployment rate.

One of the factors often put forward by economists is the trade war between China and the US, which has plunged many industries into the unknown. Besides, rising environmental requirements, the diesel crisis, the difficult transition to electric motors and China’s economic slowdown have increased the obstacles for the German automobile industry.

Some economists even speak of “the end of a German business model”. In a note published in mid-December, Oddo economist Bruno Cavalier referred to this transition:

“If we magnify the line, we are tempted to say that in two years the German economy has gone from being a superstar (at least in the European league) to the ‘sick man of Europe’ – a nickname that was already being coined in the 1990s. An export power that heavily relies on an oversised automobile sector is not ideal in current times.”

Moreover, economic policymakers are hostile to any deviation from orthodoxy, be it budgetary or monetary (but in this case the Bundesbank has lost its grip on the ECB). And they view any plans for European integration with the utmost scepticism,” according to Cavalier.

In Italy, the indicators are far from being green. According to the latest outlook from Istat, the Italian statistics institute, GDP is expected to grow by only 0.2% in 2019 and 0.6% in 2020. On the labour market front, the unemployment rate is expected to stagnate around 10% in 2020.

Germany's slowing growth is penalising the whole of Europe

The European train is slowing down as one of its main drivers, the German economy, is experiencing a slowdown. At the same time, job creation across the EU is declining. EURACTIV’s partner Euroefe reports.

The services sector remains resilient

The eurozone’s growth continues to be driven by the services sector. The PMI index measuring activity in the tertiary sector rose from 51.9 to 52.8 between the last two months of the year, to reach a four-month high. Reduced reliance on external markets can explain such resilience compared to the industrial sector.

By the end of the year, economists were wondering about the risks of spreading difficulties from industry to the service sector.

“Given the recent additional stimulus measures adopted by the ECB, these latest results are disappointing at first glance, while the impact of the current difficulties in the manufacturing sector on the economy, as a whole, remains of great concern,” Williamson added.

In France, growth in the services sector accelerated despite fears of a transport strike in protest against government reform. “By the end of 2019, the French services sector saw a slight acceleration in business activity,” commented Eliot Kerr, an economist at IHS Markit.

“This result completes a robust expansion of production in the last quarter, supported by strong growth in orders,” he added.

Eurozone equipped to save big economies, says euro rescue fund chief

The European Stability Mechanism, the euro area’s rescue fund, would have enough firepower to save large economies if necessary, including Italy, the fund’s chief Klaus Regling said on Tuesday (29 October).

[Edited by Zoran Radosavljevic]

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