While the Eurozone Q2 GDP was revised down to -0.2% quarter-on-quarter, there are a few signals that things might be looking up in certain areas. Let’s break it down.
Industrial Production: A Bright Spot
The standout here is Eurozone industrial production, which jumped 1.8% in August—the sharpest increase since February 2023. This was mainly driven by a 3.7% increase in capital goods production. It’s a solid move upward, especially considering the annual growth rate is now back in positive territory at 0.1%. Compare that to July’s -2.1% and June’s -4.2%, and you can see the trend heading in the right direction.
In Germany, we also saw investor confidence bounce back. The ZEW expectations index jumped to 13.1 in October, from 3.6 the month before. That’s a significant boost in sentiment, even though the current conditions indicator still shows some weakness. The market’s starting to price in more rate cuts in Europe and the U.S., which is driving that optimism.
source: zew.de ZEW-Index 15/10/2024
What About Interest Rates?
The European Central Bank (ECB) is likely to cut rates again on this Thursday October 17th as the focus shifts from controlling inflation to stimulating growth. Germany’s already feeling the pinch, but the ECB’s easing should help businesses and consumers weather the storm. We’re expecting rates to get closer to neutral by next year, and that’s something to watch for.
Real Wages and Consumer Spending
Now, on wages and spending—this is where things get interesting. Wages are rising, but retail sales only ticked up by 0.2% in August. That’s pretty flat. Consumers haven’t started spending like we’d expect, even with real disposable income improving. But as inflation cools and rate cuts take hold, we could see that change.
The key takeaway here is that falling inflation and a looser labor market should ease wage growth next year. But in the short term, wage pressures are still present, and we might not see the spending jump we’re hoping for just yet.
The Bottom Line
For investors, the Eurozone is in a transition phase. Industrial production is bouncing back, investor confidence is improving, and the ECB is taking steps to support growth. But we’re not out of the woods yet—consumer spending and wage growth need to catch up.
If you’re thinking about where to place your bets, keep an eye on how these rate cuts play out and whether consumer sentiment follows suit. In the meantime, we’re watching the ECB closely, especially as inflation comes under control and growth becomes the main priority.
Prepared by:
John Knobel, Managing Director
J. Knobel Investor Services Limited
Office: +357 22 258 790 (Recorded line)
