MacroscopeEurope’s economy deeply exposed to growing global gloom

It is claimed hope springs eternal, but confidence can be a very fickle thing. Sure enough, when things are going well it is all too easy to be swept up in the euphoria and end up detached from reality. In the case of the euro zone economy, the optimists are in for a rude awakening.

European economic confidence surveys might be pointing to better times ahead, but with the rest of the world drowning in pessimism right now, the euro zone looks very exposed and swimming against the tide.

Headwinds are blowing hard from all quarters. China’s economy is slowing down, the US Federal Reserve remains hell-bent on tightening policy, energy and commodity prices are in deep descent, and financial markets are threatening to descend into chaos again. The omens are deeply disturbing.

With the global economy under duress and deflation risks still on the rise, it is unlikely to be too long before Europe’s leading indicators begin to waver and point the way towards slower growth ahead.

Right now, Europe’s economic sentiment index, Germany’s IFO business climate index and the euro zone purchasing managers’ survey are taking their cue from the super-stimulus generated by the European Central Bank’s (ECB) quantitative easing (QE) programme. The surveys anticipate the euro zone becomes so flooded with liquidity that self-sustaining recovery eventually kicks in.

QE measures have had some positive effects, with euro zone monetary indicators showing definite hints of stronger activity. Loan demand has picked up and money supply growth is accelerating too. Consumer credit, mortgage borrowing and corporate loans are all back in positive growth territory again, albeit from a very weak base in recent years.