European Economics: data flow may prove challenging to that relative optimism

Eurozone Pil about fourth quarter 2015 will be released on next friday. Expectations for euro area growth this year have remained solid, despite steady downgrades of growth forecasts for other developed economies. That resilient outlook has been supported by the recent resilient outperformance of the euro area's cyclical industrial indicators. In turn, the outperformance of euro area cyclical data in the past year or so has been driven by two main factors. One external: the depreciation of the euro in 2014 allowed euro area exports to grow steadily by gaining market share despite insipid global trade. And the other one domestic: easier fiscal policy and financial conditions, accompanied by a surge in real household and corporate incomes from the lower oil price, is delivering a solid and sustained recovery in domestic demand.

But support from the former looks to be waning, as measures of industrial and trade growth outside the euro area remain weak, and the benefits of the euro's fall fade. Consequently, Credit Suisse thinks the broad-based, but modest, drop in a wide range of market-sensitive euro area cyclical indicators in January marks a negative inflection point. In particular, the swiss broker expects them to weaken further in coming months. "That weakness – the analists say – should be shallow and transient, driven by exogenous factors. Endogenous factors, especially consumer demand, should remain supportive".

But even a short and shallow softening would have consequences. In its opinion, market participants could worry that a deterioration in euro area data marks the broadening of global cyclical weakness to a hitherto resilient region. It also raises the chances of more aggressive action from the ECB in coming weeks and months. "The measured nature of recent policy moves, including December's disappointment, has been due to strong and stable real economic data – Credit Suisse affirms – Cyclical weakness would embolden the ECB to inoculate the euro area from external economic and financial risk by cutting policy rates and accelerating and expanding the scope of asset purchases".

By Credit Suisse Economic Research