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The Good News: Eurozone Momentum

Published 05/17/2017, 03:44 PM
Updated 05/14/2017, 06:45 AM

The pace of global economic growth is picking up after several years of weak performance. First-quarter results indicated a widespread advance at a modest pace and leading indicators for the first month of the second quarter confirm the continuation of a solid and broad-based expansion in both manufacturing and services. The J.P. Morgan Global All-Industry Output Index for April remained at its strong March level of 53.7. Stronger readings in particular for the eurozone and also for the US, UK and Brazil offset some moderation in the readings for Japan, China, India and Russia. Global industrial production and trade have strengthened in 2017 to date.

The broad-based rebound in the 19-country eurozone economy is notable. First-quarter GDP growth was at an annual pace of 1.7%, more than double the 0.7% rate for the US. The largest eurozone economy, that of Germany, is central to the eurozone’s acceleration, growing at an annual rate of 1.7%. The Markit Eurozone Composite Purchasing Managers Index (PMI) for April indicated that economic activity accelerated in the first month of the second quarter, with the index reaching a six-year high. Output in both the manufacturing and services sectors hit 72-month records. Ireland, Spain and Italy had the highest output growth rankings, with Germany and France close behind.

Looking Ahead

Business optimism is strong, with robust new orders. As of 5/15, the German economic sentiment index, ZEW, stands at its best level in nearly six years. OECD’s Composite Leading Indicator (CLI) measure for the eurozone points to stable growth momentum at an above-trend rate, with the CLI for the German economy gaining momentum. OECD’s CLIs are “designed to anticipate turning points in economic activity relative to trend six to nine months ahead.” (OECD.org)

Both the UK and US economies followed a weak first quarter with pickups in April. In the UK, first-quarter GDP growth was at an annualized rate of 1.2%, following a 1.8% advance in 2016. The largest UK sector, services, rebounded significantly in April, registering stronger business-to-business sales and increased employment. The smaller manufacturing sector also rebounded, with stronger output, new orders and employment. The US composite PMI also rose in April, but the 53.2 reading was just marginally better than March’s 53. The rate of growth in manufacturing output was the weakest in seven months, and services growth was also weak. The latest OECD CLIs for both economies indicate growth momentum that is “stable.”

In Japan, it looks like first-quarter GDP growth accelerated to an estimated 1.7% annualized rate from the 1.2% pace in the fourth quarter of 2016. The Nikkei Composite Output Index for April moderated a bit from March’s 19 month high, due to slower but still solid growth in service-sector activity and new business. Manufacturing output growth was faster in April. With the OECD’s CLI indicating stable growth momentum, the ongoing solid economic expansion looks sustainable.

Emerging Markets

The EM conomies have generally been taking part in the global recovery, with considerable variation among countries. The pace of growth in the Chinese economy has been moderating, with the Caixin China Composite PMI for April indicating a further slowdown in growth momentum. It was the lowest reading in ten months. Growth in both manufacturing and services decelerated in April. Similarly, in India, growth of private-sector activity as measured by the Nikkei India Composite PMI Output Index softened in April to register its weakest increase in three months. Economic activity also slowed in Russia in April, while a broad recovery from a two-year downturn was a welcome development in Brazil. Looking forward, the OECD CLIs signal gaining growth momentum for the Brazilian and Russian economies and stable growth momentum for China and India.

The eurozone is the current leader on the economic momentum front, as reflected in the relative momentum of national equity markets. The ranks of the top 15 national markets with respect to the momentum of their main country ETFs include just eurozone and emerging-market countries plus Hong Kong, as calculated by our friends at Ned Davis Research. The outperformance of eurozone equities year-to-date (May 15) has been substantial. The iShares MSCI Eurozone ETF, (NYSE:EZU), is up 18.25% on a total return basis. This compares with a 10.48% gain for the MSCI All Country ETF, (NASDAQ:ACWI) and the 7.97% gain for the US SPDR S&P 500 ETF (NYSE:SPY). The eurozone’s equity performance was matched only by the iShares MSCI Emerging Markets ETF (NYSE:EEM), which gained 18.94%.

At Cumberland Advisors, momentum is only one of the factors we consider. The leading momentum of the eurozone economies is an important positive element near term. Nevertheless, the unsettled political situation in Italy (where elections are to be held in early 2018), unresolved eurozone bank-sector issues, remaining populist threats and uncertainties about Brexit also need to be kept in mind.

Sources: markiteconomics.com, OECD.org, Ned Davis Research, Oxford Economics, Bloomberg

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