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Europe's bosses are concerned. This is evident from the latest business assessments by industrial managers and service providers in the euro area. This is shown by the Markit Institute's highly regarded survey among purchasing managers; preliminary results for January were released on Friday.
The professional forecasters from business and research surveyed by the European Central Bank (ECB) also remain skeptical. Their growth forecast for the euro area this year has risen on average from 1 to 1.1%, but has fallen from 1.3 to 1.2% for the next one - in each case compared to the survey in the fourth quarter of 2019. The ECB credit survey had previously a decrease in business demand.
Stagnation at the beginning of the year
The Markit Purchasing Managers' Survey bases the first soft economic indicators every month that are actually based on company estimates. In January there were positive signals from the two largest economies in the currency area, while the rest weakened. In Germany, the index for industry and service providers rose sharply from 50.2 to 51.1 points. Values of more than 50 counters mean growth. In France, industry performed better (from 50.4 to 51 points), but the situation at service companies deteriorated (from 52.4 to 51.7 points).
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With the weaker rest of the euro zone, the overall index in the currency area remained at 50.9 points as in December. This would mean a stagnating gross domestic product that only grows by 0.1%, it said at Markit. It is encouraging, however, that German export orders in particular are approaching the expansion threshold.
The Governing Council reacted to weak credit survey results on Thursday after its meeting. Central bank head Christine Lagarde stated at the press conference that the growth in loans to non-financial corporations had declined from 3.8% in October to 3.4% in November. "The reason for this slowdown may be a delayed reaction to the previous economic slowdown," she said.
This was also shown in the survey on the lending business in January. Accordingly, the banks surveyed for the first time since the beginning of 2014 reported a decline in corporate demand for credit. It has worsened particularly in France and Spain, while it has improved in Italy. For the entire euro zone, however, the following applies: corporate investment requirements no longer contributed to credit demand, which could indicate renewed weakness in investment.
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In Germany, however, the positive balance of banks reporting increasing demand and houses reporting declining demand decreased only slightly from 9% in the third quarter to 6% in the fourth quarter. At second glance, however, it becomes apparent that the balance for large companies has plummeted: from +10 to –7%. A significant majority of credit institutions report a decline in demand for loans. Equally alarming is the balance of bank expectations, which has worsened for all companies from –6 to –9%. For large companies, the bottom line remained consistently negative at –10%.
Inflation outlook weak
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The ECB survey of professional forecasters, on the other hand, shows that the median inflation forecast has leveled off at 1.7% - most recently with a view to 2024. In December, they had dropped to the lowest value since the start of the survey.
The Governing Council only decided in September to link its forward guidance to the inflation outlook. The forecasts of experts outside the central bank also play an important role in this. The key interest rates should remain at their current or lower levels until the inflation outlook approaches the target of just under 2%. The Governing Council confirmed this statement on Thursday
