The euro area's recovery is not slowing down

The recovery is continuing in the euro area without any great changes. Judging by the trend in business indicators, the rate of growth is remaining steady in the second half of 2015. One sign of this is that the IMF has kept almost all its growth forecasts intact for the region (1.5% in 2015 and 1.6% in 2016). The recovery is therefore continuing, supported by low oil prices, the euro's depreciation and accommodative monetary policy. In the short term the euro area's growth rate might be affected by a greater slowdown in the emerging economies than expected although, if this did occur, it could be offset with expansionary monetary policy. Nevertheless this should not be a medium or long-term solution: structural reforms still need to be implemented (economic, fiscal, bank and political union) which will help to improve productivity.

Economic activity holds firm in Q3 in spite of the slowdown in the emerging economies. As a whole the figures indicate a gradual recovery in industry although this varies between countries. In August, while industrial production grew in year-on-year terms at a similar rate to the previous month in Germany and Spain, the figures recorded in Italy and in France were slightly lower. With a view to Q4, one positive note is the trend in the euro area's composite PMI in October, standing at 54.0 points, slightly above the figure posted for Q3 (53.9) and comfortably within the expansionary zone. By country, the French index recorded an increase this month that would be compatible with a slight acceleration in activity although this is still at a contained level. For its part the German PMI showed a slight improvement in October compared with Q3. Another of the German benchmark business indicators, the IFO, remained at a very high level (108.3 points compared with 108.2 in Q3). These indicators therefore suggest that the German economy is holding up well to the slowdown in the emerging economies.

Consumption advances at a considerable rate. Consumption indicators for Q3 point to this component having considerable weight in the euro area's economic growth. Although the consumer confidence index fell slightly in October it is still at a much higher level than its historical average. The same situation is suggested by the rate of change in retail and consumer goods which remained high although there was some decline in August, to 2.3% year-on-year. Another indicator for consumption, vehicle registrations, also recorded significant growth in September of 10.2% year-on-year. Investment is also remaining firm. In fact, the strong increase in the industrial production of capital goods in August, namely 4.1% year-on-year, indicates that investment might have speeded up in Q3.

The gradual recovery in the labour market is supporting consumption. In September unemployment in the euro area stood at 10.8%, 0.7 pps below its level one year ago. The peripheral countries, especially Spain, have contributed significantly to this drop. With a view to Q4, the data on employment expectations provided by the European Commission suggest that the labour market will continue to improve. Specifically, industry is still at a high level compatible with increased employment although October's figure suggests a slight slowdown (–3.0 points compared with –2.8 points for Q3) and the same pattern can be seen in the services sector. Germany posted particularly good figures for its labour market with unemployment at a minimal level, namely 4.5%. This boom in the labour market has contributed to the country's strong support for refugees as the government believes they could be a useful asset in the medium term to offset shortages in labour supply.

Continued low inflation is pressurising the ECB to announce possible additional measures in December. According to the institution, the prolonged and widespread weakness of inflation, signs of a slowdown for activity in China and volatile international markets over the last few months warrant a re-examination of the degree of monetary policy accommodation. Specifically, the ECB President, Mario Draghi, confirmed the possibility of adjusting the size, composition and duration of the asset purchase programme and added possible cuts in the deposit facility interest rate. The ECB's main aim was to signal to the markets its willingness to use all the instruments available within its mandate in order to anchor interest rates at a low level and ensure a favourable exchange rate. Given that, according to the activity figures, the recovery is firmly on track, we do not expect any measures the ECB ends up taking will be very broad, mostly aimed at strengthening the commitment to meet its mandate. A similar picture is painted by the trend in inflation expectations, remaining at levels similar to those when monetary expansion began. It should also be noted that inflation increased by 0.1 pps in October to 0.0% and we expect it to rise further as the recovery consolidates and the effects of falling oil prices disappear. Core inflation also rose by 0.1 pps to 0.9%, a value which it has maintained throughout most of the second half of year.

Expansion of the quantitative easing programme, should it be carried out, would make the euro depreciate further and thereby boost exports. In August exports of goods from the euro area to the rest of the world rose by 5.6% year-on-year, a level similar to July. The rise in imports was lower, namely 3.0% year-on-year, thanks partly to low oil prices which helped to reduce the energy bill. As a result the euro area's trade balance considerably increased its surplus, from 7.4 billion euros in August 2014 to 11.2 billion in the same month of 2015. In fact one of the possible aims of the ECB in announcing potentially greater monetary expansion would be to maintain the euro's depreciation, a circumstance that would help to boost the foreign sector's good performance.

The rise in credit suggests that monetary stimuli are being effective. According to October's bank lending survey, in 2015 Q3 banks relaxed their conditions for granting loans to firms and to households for consumption, segments in which strong demand can be found, encouraged by low interest rates. However, banks tightened up their criteria slightly for mortgage loans, mainly because of regulatory reasons in spite of demand growing strongly in some countries such as the Netherlands. The survey therefore shows that banks are using the liquidity injected by the ECB to grant more loans.

The drop in interest rates on sovereign bonds makes it easier to adjust the public deficit. In Q3 the euro area's public deficit stood at 2.0% of GDP, 0.6 pps below the figure posted for 2014 Q2. The euro area's fiscal consolidation is therefore still on track, helped by the fall in risk premia and interest rates as a consequence of the ECB's expansionary monetary policy, and the institution extending the programme would further help this process. On the other hand the figures for public debt indicate that a downward slide may have started (being 92.2% of GDP in Q2 compared with 92.7% in 2014 Q2). Nevertheless, the trend in the deficit of the euro area as a whole is the result of highly disparate situations between the different countries. While Germany, for instance, had a surplus of 0.3% of GDP in 2014 (and a public debt of 74.9%), France had a deficit of 3.9% in 2014 and a debt of 95.6%. In general, the peripheral countries saw considerable reductions in their public deficit throughout 2014.

The rate of growth in the United Kingdom is slowing down but it is still strong. British GDP increased by 0.5% quarter-on-quarter in 2015 Q3 (0.7% in Q2). It is therefore continuing the slight slowdown beginning at the end of 2014: the year-on-year rate of change stood at 2.3% in Q3 (compared with 2.9% for 2014 Q3). This lower growth in activity is probably due to the stabilisation of domestic demand (the breakdown in GDP for Q3 has yet to be released), the main engine for growth since the start of the recovery but which, in the last few months, had already been showing signs of a slowdown. This moderation in GDP growth, the inflation rate being close to zero and responses by the rest of the central banks of developed countries to the slowdown in the emerging economies, could persuade the Bank of England (BoE) to delay its first interest rate hike. If the BoE is forced to maintain its current accommodative stance, attention will be centred on whether it is possible, in this context, to curb the pressure on prices of risky assets, especially real estate.