Personal Wealth Management / Economics

Weak Eurozone Growth Is Old News to Markets

Weak eurozone data aren’t shocking markets, in our view.

A spate of eurozone data ranging from industrial production to retail sales came out last week and the results weren’t pretty, in our view. It all suggests to us the eurozone’s recent flattish growth and Germany’s mild contraction may persist or even worsen somewhat.[i] But we think markets have long anticipated eurozone economic weakness—especially in Germany. Our research shows stocks look forward, so this isn’t coming as much of a shock to them—and, counterintuitively, it could help investors move on from talk of an economic downturn.

No question to us eurozone economic data for Q3 have gotten off to a poor start. July German industrial output fell -0.8% m/m, its third straight monthly contraction, and Spain’s dropped -4.0%.[ii] This brought year-on-year declines to -2.2% and -1.8%, respectively.[iii] Meanwhile, eurozone retail sales fell -0.2% m/m in July, leaving them down -1.0% y/y.[iv] Then, too, as we discussed recently, August purchasing managers’ index readings seemingly confirmed contraction continued last month. Moreover, leading credit indicators have signalled stalling growth for months. Private sector lending slowed to 1.6% y/y in July and has trailed inflation (economy-wide price increase) for two years, suggesting real credit (adjusted for inflation) to the economy has been contractionary.[v] M3 money supply is also falling now.[vi]

But for stocks, we think the data are only part of the story. The other part, in our view: How do these results align with expectations? On that basis, we don’t think there is much of a surprise here. After the IMF projected German recession (prolonged economic contraction) last October, gross domestic product (GDP) contracted for two quarters in Q4 2022 and Q1 this year (with growth flat in Q2), prompting pervasive talk amongst commentators we follow about its earning the sick man of Europe moniker.[vii] This was as Germany’s widely followed IFO Business Climate Survey hit an October 2022 low of 85.2—which August’s reading recently retested at 85.7.[viii] (Exhibit 1, blue line) Headlines now describe Germany’s “economic rut” getting deeper, with demand “feeble” and the outlook “bleak.”[ix] Attitudes toward the eurozone as a whole mirror those toward its largest economy in commentary we read. After falling for four straight months, the European Commission’s Economic Sentiment Indicator breached its October low in August (maroon).[x]

Exhibit 1: Sentiment Seemingly Reflects Recession Already

Source: FactSet, as of 13/9/2023. Recession shading based on Euro Area Business Cycle Network dates.

That may seem discouraging, but we think stocks likely pre-priced this year’s eurozone economic weakness last year (Germany’s, too). Exhibit 2 shows eurozone stocks hit their lows in September 2022, before Q4’s GDP downturn. They rose thereafter despite Q1 GDP’s second report of -0.1% q/q contraction, which was later revised away.[xi]

Exhibit 2: Eurozone Stocks Moved Ahead of GDP

Source: FactSet and Eurostat, as of 13/9/2023. MSCI EMU returns with net dividends in euros, 12/9/2018 – 12/9/2023, and eurozone GDP, Q4 2018 – Q2 2023. Note: Right-hand side y-axis truncated; Q2 2020’s GDP fell -11.5% q/q and Q3’s rose 12.4%.

Exhibit 3 gives a fuller history of stocks moving before turns in data—and sentiment. In our view, stocks are the ultimate leading indicator, routinely falling before weak data register and, when said weak data hit, rising through the deep pessimism that often follows. We think COVID’s onset put this in stark relief: Markets appeared to weigh the extent of lockdowns’ impact before they showed in the data, then looked forward to the recovery before reopening.

Exhibit 3: Longer View of Eurozone Stocks Moving Ahead of GDP

Source: FactSet and Eurostat, as of 13/9/2023. MSCI EMU returns with net dividends in euros, 12/9/2005 – 12/9/2023, and eurozone GDP, Q4 2005 – Q2 2023. Recession shading based on Euro Area Business Cycle Network dates. Note: Right-hand side y-axis truncated; Q2 2020’s GDP fell -11.5% q/q and Q3’s rose 12.4%.

July and August eurozone data may seem gloomy, but they are backward looking. We don’t think weak data now say anything about where stocks are headed because stocks move most on the gap between future reality over the next 3 to 30 months and present expectations. Currently on the expectations front, in our view, widespread eurozone pessimism saps downbeat data’s surprise power. Forthcoming data may prove gloomy, too, but we don’t think this is likely to sway stocks much when most everyone anticipates it.

Somewhat perversely, though, seeing these dour data can help people move on from their recession fixations, providing a sense of closure. Once it manifests, the implications become visible, and we find alarm over them loses its power in the light of day. As uncertainty clears, warnings can recede—or at least lose their sting—allowing stocks to ascend bull markets’ (broadly rising equities’) proverbial wall of worry.

When big alarms blare—like over recessionary data—accompanied by market volatility, it can be hard to shake, especially when it appears verging on fruition. But when the Bad Thing everyone seems to be waiting for happens and folks see it isn’t so terrible—or what was expected—we find people tend to get over it pretty quickly.


[i] Source: Eurostat, as of 13/9/2023. Statement based on eurozone and German GDP, a government measure of economic output.

[ii] Source: FactSet, as of 13/9/2023. Germany and Spain industrial production, July 2023.

[iii] Ibid.

[iv] Source: FactSet, as of 13/9/2023. Eurozone retail sales, July 2023.

[v] “Monetary Developments in the Euro Area: July 2023,” Staff, ECB, 28/8/2023.

[vi] Ibid.

[vii] Source: Eurostat, as of 13/9/2023. Statement based on German GDP, Q4 2022 – Q2 2022. “IMF Says Germany and Italy to Slip Into Recession in 2023,” Staff, Deutsche Welle, 11/10/2022.

[viii] Source: FactSet, as of 13/9/2023.

[ix] “Germany’s Economic Rut Gets Deeper,” Paul Hannon, The Wall Street Journal, 7/9/2023. Accessed via the Centre for European Reform.

[x] Source: FactSet, as of 13/9/2023.

[xi] Source: Eurostat, as of 9/6/2023.

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