Fra Commercbank:
The weak euro and cheap oil appear to be fuelling the euro zone economy. Even so, a strong upswing is not on the cards since the sharp rise in private debt in many euro countries in recent years is acting as a drag on growth. This suggests that unemployment will barely fall in many member states; output will not reach pre-crisis levels for another two to three years and much stronger inflation is not in sight. Further expansionary measures by the ECB thus cannot be discounted.
Weaker euro and cheap oil are driving the economy … When looking at the economy in Germany and the euro zone, markets seem to be quite sanguine. But only four months ago, fears of a global economic slump and another recession in the euro zone pushed the DAX down close to the 8000 level. We noted at the time that a recession was unlikely. For one thing, our Early Bird index – our leading indicator for the German economy – was already pointing upwards (Chart 1).
It was therefore signalling that the economic environment had already improved considerably, especially as the euro ceased appreciating in spring 2014 and had subsequently fallen significantly against most other currencies. In the meantime, this brighter climate is having an effect. The economic recovery has been stronger so far than had been expected in the autumn, probably because of further declines in the euro and a much lower oil price.
The German economy picked up in the fourth quarter and posted a decent 0.7% growth rate on the previous quarter, and the 0.3% growth rate for the euro zone was also slightly above expectations. Furthermore, brighter business sentiment across the euro zone and the clear uptrend in German industrial orders, after a weak patch in mid-2014, are factors suggesting the upward momentum should continue. Our growth forecasts for 2015 (Germany: +1.5%, Euro zone: +1.1%) are certainly rather cautious. … but a debt correction will hinder the upswing That said, a sustained strong upswing is unlikely, at least for the euro zone; lending is very weak in many member states and has been falling since spring 2013 in the euro zone as a whole (Chart 2). This may be due in part to the fact that banks have restricted the supply of credit for regulatory reasons (higher capital requirements and/or preparations for the stress test last autumn). ECB surveys show that the supply constraints are now easing somewhat. However, the weakness of credit demand is at least as important. Private debt has risen so sharply since the start of monetary union that a correction is now inevitable. And as long as this correction continues, expansionary monetary policy cannot properly impact on the economy (see box on page 3). There are substantial differences, though, between the member states (Chart 3): • In some countries – including Germany – private debt has barely risen since the start of the new millennium, which implies far less need for correction today. In these countries, credit demand could pick up in the coming quarters against a backdrop of very low interest rates, which would give an additional tailwind to the economy
