Eurozone Data Highlights Trade Wars Impact on Growth

Though Inflation Still Rising

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The latest Eurozone data this week once again gave mixed readings on the health of the economic recovery. Following weakness in Q1 GDP, the reading for Q2 GDP also came in weaker than expected with the YoY figure printing at 2.1% vs 2.2% expected and 2.5% prior. Although this might still prove to be a temporary decline it seems that bigger issues are now conspiring to weigh on the eurozone economy as the negative impact on confidence from the recent trade disputes as well as weaker real household income have combined to bring GDP growth down.

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Trade Woes Weigh on Data

The impact from trade uncertainty has clearly had a significant part to play in the Q2 reading likely due to the confidence hit more than the impact on real export growth. Diminished confidence in the eurozone has likely fed into weaker domestic demand growth and although credit conditions remain favourable, this is likely to exert downward pressure on investment.

Weaker consumer confidence has also taken some of the momentum out of consumption growth on the back of growing trade concerns and also slower growth in real household income per capita since around summer 2017.  Q2 has extended this trend due to the hike in fuel prices which has probably outpaced wage growth.

Inflation Rises Again

However, there has been some positives in recent data as inflation has remained higher despite the weakened 2018 growth path for the eurozone economy, fuelled mainly by stronger energy prices. The flash estimate from Eurostat (the statistical authority of the European Union) showed that headline CPI for the eurozone printed 2.1% in July, above expectations and also having risen from the prior 2%. The energy index rose 9.4% YoY and was also up 84% from the prior reading in June. though the effects from this will likely weaken over the coming months, the initial impact has been clear.

Outside of energy prices food, alcohol and tobacco also made positive contributions, rising 2.5% year on year in July though food prices specifically were lower in July than they had been in June. Non-Energy items yielded the weakest contribution to eurozone inflation in July rising just 0.5% after June’s equally low increase of 0.4%.

Summary

In all the data confirms what the ECB outlined at its most recent meeting, that inflation remains strong but economic growth has moderated somewhat. With this in mind there is very little to suggest that the ECB will begin tightening earlier than expected and furthermore, if data weakness continues to persist, there is a growing risk that QE will be extended beyond the year end and rates will remain at current low levels for long.

While weakness in Q2 is clearly disappointing, it is worth considering the meeting between President Trump and EC president Juncker who met just a day ahead of the last ECB meeting and declared their intentions to work together to resolve their trade disputes and dismantle tariffs and barriers. If the market starts to see positive development within this space, this should held assuage consumer fears and put the economic recovery back on track given that much of the hit to growth has come form these trade concerns.

Technical Perspective

eurozone

The block of consolidation in EURUSD, underpinned by the 1.1546 support, continues to play out with price now moving within a contracting triangle, highlighting the lack of direction in the market. If price rallies out of the triangle, focus will be on a test of the 1.2042 – 1.2113 resistance area which could prove to be the right shoulder of a large head and shoulders pattern, suggesting the potential for a much bigger downside move in the EURUSD. Alternatively, if price breaks down through the triangle low, focus will be on the 1.1466 level support, which, if broken paves the way for further, immediate losses in EURUSD.

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