- With positive eurozone data continuing to roll in, debate is shifting to driver of recovery
- Draghi has certainly had some luck, but anticipation of QE has also been a big factor
- US firms still cautious on capital spending as durable goods report disappoints
Discussion no longer about whether eurozone is recovering
Many commentators have been gloomy about the eurozone for so long, that the first reaction to the better eurozone data was to play it down. However, economic reports are now making an overwhelming case that the single currency area’s economy is gaining pace.
Bellwether Ifo index beat expectations
Yesterday, Germany’s Ifo business climate indicator became the latest economic report to make ‘mince-meat’ out of the consensus expectation of economists. The overall index rose to 107.9 in March (consensus: 107.3) from 106.8 in February. The expectations indicator – which is the better tracker of GDP growth – jumped to 103.9 from 102.5. At current levels, it is consistent with GDP growth of almost 1% qoq.
Stronger data triggers discussion of drivers of recovery
Given recent reports, the discussion is no longer whether the eurozone is in recovery mode, but rather what is driving it. Given that the ECB announced its QE programme in January, the debate has centered on whether this is at the root cause of the revival.
Draghi: the lucky general?
Napoleon once said that he preferred to have a lucky general than a clever one. So has ECB President Draghi been incredibly lucky with the timing of QE, or is the policy that he drove through the Governing Council doing the trick? The truth is somewhere in between. The eurozone economy is currently benefiting from tailwinds that have very little to do with QE. The collapse in oil prices, stronger world trade growth and some easing in bank lending conditions have been important factors.
Giving QE its due
Having said that, QE is also already underpinning demand. The sharp fall in the euro, has partly reflected dollar strength given the that the Fed is edging towards hiking interest rates. However, there can be very little doubt that anticipation of ECB asset purchases has been a key factor driving down the euro. Similarly, bond yields have fallen, especially in the periphery.
US capital spending disappoints…
Business spending in capital goods was disappointing. February’s new orders of durable goods fell 1.4%, pulled down mainly by a drop in transportation equipment, while orders for machinery were also soft. Shipments in core capital goods (non-defense, ex-aircraft), which are used to calculate equipment spending in GDP, rose by just 0.2% following a 0.4% decline the previous month.
…adding to signs of soft GDP growth in Q1
Although durable goods orders are volatile and subject to large revisions, the weak data in the past few months could be a reflection of lower oil prices, which remain a drag for investments in the energy sector. The strong dollar could also be limiting capital expenditures, as overseas profits are being cut. Bad weather and the port strike in the West Coast have certainly also been important factors. Investment in equipment was solid in 2014, growing 5.4% yoy, but this report adds to the softer GDP growth outlook in the first quarter. Another report, released yesterday points, however, to more positive growth in the factory sector. March’s US flash PMI edged up to 55.3 from 55.1 in February. This could suggest that the factors affecting the durable goods report are mainly temporary. We expect the US economy to pick up steam again in Q2.