Let's try and put the pieces together with the aim of getting a picture of where the European market might be heading in the short to medium term.
The image I get is of an astronaut walking on the moon. The good news is that the situation hasn't deteriorated into an economic meltdown. In fact, the data suggests that the economy has stabilized, albeit at a lower level. The wheels of industry are turning, consumers are spending, but economic activity is moving in ultra slow motion.
In Europe's largest economy, Germany, there’s been some good news. German Unemployment fell by 27,000 in December after seasonal variations in the data, following November's 16,000 drop. Consumption is picking up too, retail sales expanded by 1.0% on the month in November, according to the statistics office, which anticipates retail sales to have expanded by 1.2 percent in real terms in 2014.
German consumption is likely to gain momentum in 2015, with consumers having more disposable income due to the new low oil price environment.
The latest retail sales data indicates that household savings on energy are being spent on goods and services.
But the thorn in the side of EU economic data is the December consumer prices inflation of negative 0.2%, which is below their December 2013 levels. The latest EU inflation figure represents the first year-over-year fall since October 2009 and it marked the last in a sequence of five months during which prices were lower than a year earlier.
It is also well below the ECB's target of under 2.0%. Inflation has been easing since Aug. 2012, falling below 1.0% in Oct. 2013, and below 0.5% in July 2014.
The falling inflation rate indicates sluggish consumer demand. The worry is that if the EU Consumer Price Inflation (CPI) continues along a downward trajectory it will lead to continuing deflation, which is a typical symptom of a depression. Falling prices put off consumers from spending and deter businesses from making investments. The falling consumer demand, due to falling prices, can in itself create a vicious circle with dire consequences for an economy.
"If inflation remains low for a long time, people might expect prices to fall even further and postpone their spending," ECB President Mario Draghi warned in a newspaper interview published at the beginning of the month. "We are not there yet. But we need to tackle this risk."
However, if we put the EU's December inflation rate into context, it might not be all that bad.
Oil price has fallen by more than 50 percent in the last six months. The black gold isn't just a fuel to power the lights and the auto-mobiles, it’s also used in the manufacturing of countless products. So a rapid fall in the oil price is likely to skew the inflation figures.
Moreover, with unemployment falling in Europe's largest economy and consumption picking up, the increasing consumer demand will probably start pushing prices up as we move forward. So it might still be premature trying to read too much into a few negative inflation figures, particularly in an environment of rising employment and consumption data combined with falling input costs from oil.
January 6th news release from Markit confirms that the Eurozone posted the slowest economic growth for over a year in the fourth quarter.
Eurozone economic activity increased for the eighteenth successive month in December, with the latest PMI data signalling a mild gain in growth momentum at year end. However, the rate of expansion remained among the weakest seen over the past year.
The slight improvement in growth momentum in December was centred on the service sector, where business activity rose at a faster pace. Manufacturing production also continued to increase.
Markit's news release confirmed sluggish growth in 2014 for the big economies in the Euro bloc i.e. Germany, France and Italy.
The German economy showed a slight pick-up in December.
Output in France fell for the eighth month running, as a slight recovery in service sector business activity failed to offset the deepening downturn in production at manufacturers. Italy, meanwhile, fell back into contraction, as levels of output and new business both decreased over the month.
More upbeat data was registered in Ireland and Spain, which both saw strong and accelerated increases in economic activity and total new business.
The Eurozone employment rose for the second month in a row during December. Workforce numbers increased in Germany, Spain and Ireland, offsetting further
reductions in France and Italy.
The Eurozone Services Business Activity Index remained above the neutral 50.0 mark for the seventeenth month in a row but came in below the flash estimate of 51.9
December saw the big-three economies continue to report lacklustre service sector performances.
Output growth in Germany stabilised at November’s 16 month low, while Italy fell back into contraction for the first time since September
Germany and Italy were both impacted by declining
inflows of new business, with new orders falling for the first time in one and a
half years. France reported an increase in activity and new orders for the first time in three months.
Chris Williamson, Chief Economist at Markit sums up, “The eurozone economy ended 2014 with its worst quarter for over a year. There’s some relief in that the rate of growth picked up slightly in December, rather than easing further.”
“2014 as a year in which recession was avoided by the narrowest of margins, but the weakness of the survey data suggests there’s no guarantee that a
renewed downturn will not be seen in 2015”, he added.
But the clue might be in the slight upturn in December, the benign impact of cheap oil on the Euro bloc economies is now visible. Germany retail sales are rising and consumption is moving upwards. The cheap oil, the lifting of sanctions with Russia and a favourable Greek outcome might be enough to put the bear back into hyphenation and fuel a bull run.
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