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Flash Economics Summary: Cyclical Downturn in the Euro Zone

Core Content

The document "Flash Economics" analyzes the cyclical downturn in the euro zone, focusing on the factors contributing to the economic slowdown observed in early 2018. It highlights that the growth cycle peaked in late 2017, leading to a decline in production prospects and a gradual slowdown in economic growth. The report explores several potential causes of this downturn and concludes that multiple factors are at play.

Main Causes of the Cyclical Downturn

• Slowdown in global trade: Global trade volume and value have declined, which has also affected euro-zone exports. This is attributed to the global economy returning to full employment, which may limit further growth.

• Reduced effectiveness of monetary policy: Despite expansionary monetary policies since 2014, the impact on credit and demand has weakened. Credit growth has slowed, the savings rate has halted its decline, and housing investment has slowed.

• Downturn in the investment cycle: The investment cycle in the euro zone peaked in 2015-2016, and this has contributed to the overall economic slowdown.

• Growing hiring difficulties: Companies are facing significant challenges in hiring, which is affecting employment and, consequently, economic growth.

• Slowdown in real wages: The rise in oil prices has led to increased headline inflation, which has curbed real wage growth.

Fiscal Policy

• More expansionary fiscal policy: Contrary to some expectations, fiscal policy in the euro zone has become more expansionary in recent periods, indicating that it is not a primary cause of the downturn.

Supporting Evidence

• Production Prospects: Surveys such as the PMI (Chart 1) and the synthetic indicator of economic sentiment (Chart 2B) indicate a downturn in economic activity.

• Exports and Global Trade: Charts 3A and 3B show a decline in both global and euro-zone trade volumes and values.

• Monetary Policy and Credit: Charts 4A, 4B, 4C, 4D, and 4E provide data on monetary policy, credit growth, savings rates, and housing investment, all showing signs of weakening.

• Investment Cycle: Chart 5 illustrates the peak of the investment cycle in 2015-2016.

• Employment Trends: Chart 6 highlights significant hiring difficulties despite a high unemployment rate.

• Real Wages and Inflation: Charts 8A, 8B, and 8C show the impact of rising oil prices on inflation and real wage growth.

Conclusion

The cyclical downturn in the euro zone is explained by a combination of the following factors:

• A slowdown in global trade and euro-zone exports.
• Reduced effectiveness of monetary policy in stimulating credit and demand.
• A decline in the investment cycle.
• Significant hiring difficulties for companies.
• A slowdown in real wage growth due to rising oil prices.

Fiscal policy, contrary to some assumptions, has not been a contributing factor to the downturn.

Disclaimer

This document is intended for professional and qualified investors only and is strictly confidential. It is not a financial analysis and does not constitute personalized investment recommendations. The information is based on public data and is not a complete analysis of all material facts. No liability is accepted for the distribution or use of this document. The views expressed are those of the authors and may differ from those of Natixis or other entities. The document is subject to change without notice and is not an offer or solicitation to buy or sell any financial instruments.