Fresh Data Shows Eurozone Economy Remains on Track for 'Tick-shaped' Recovery

Image © Alfred Yaghobzadeh, European Commission Audiovisual Services

The Eurozone economic recovery remains on track according to latest Eurozone and Germany data which shows that while a sharp 'v-shaped' recovery might not be attainable, a 'tick-shaped' recovery is plausible.

German Ifo data - which gives a timely snapshot of both German economic activity and expectations for future activity - came in better than expected when released on Monday morning.

The German Ifo Business Climate read at 90.5 in July, which is up on last month's 86.3 and better than the 89.3 the markets were expecting. The Business Expectations component, which shows business expectations for the next six months, was a bullish 97.0 in July, which is up on last month's 91.6 and stronger than the 93.7 markets were looking for.

The Current Assessment component registered at 84.5, up on June's 81.3 but slightly less than the market was looking for at 85.0.

"Signals from money and credit statistics as well as the real economy confirm that the Eurozone economy remains on track for a tick-shaped recovery," says Holger Schmieding, Chief Economist at Berenberg Bank. "Businesses believe that the worst if over. This bodes well for their future spending."

"The V-shaped recovery continues but the bounce back is losing steam," says Carsten Brzeski, Chief Economist, Eurozone and Global Head of Macro at ING Bank N.V.

Concerning the outlook, Schmieding warns that while the recovery is on track, risks remain serious.

"But they stem mostly from external factors such as the outlook for the pandemic in the US. After agreeing on a €750bn recovery fund, domestic economic and political factors support our call for a tick-shaped recovery," says Schmieding.

However, Brzeski says: "it would be a huge surprise if the German economy could maintain the growth momentum of the first months after the lockdowns. We are currently in a mechanical rebound and the real face of the recovery will only become clear in the coming months."

"While the fiscal stimulus, both in Germany and now also at the European level, bodes well for domestic demand and eurozone exports, the structural damage to the economy as well as continued weaknesses in major trading partners outside of the eurozone will hamper the recovery."

Separate data from the ECB meanwhile showed that Eurozone M3 Money Supply - which is the velocity of money in the economy - grew 9.2% year on year in June, up on the previous month's 8.9%. The growth rate of M1 money supply rose 12.6% year on year in June from 12.5% in May.

As the above chart shows, the supply of money to the economy tends to indicate where economic growth is heading. The substantial easing provided by the ECB has increased the supply of money into the economy as it contracted, and should previous relationships hold, economic growth over coming months should be relatively robust.

"Aided also by the ECB’s aggressive policy response to the pandemic and massive fiscal support, companies and – to a lesser extent – households have built up significant reserves to tide them over the fallout from the pandemic and support the ongoing rebound in spending," says Schmieding.