While stock markets have been worrying about a (so-far) mild slowdown in the US, the eurozone has been suffering a more serious one. Last week’s figures showed that industrial production in the region fell by 1.7 per cent in November. That means it is now likely that the overall economy barely grew at all in the fourth quarter. Fears about a trade war and Brexit, China’s slowdown, and troubles in the German car industry (which has seen its output fall 18 per cent in the last 12 months) are all causes of this.
But there are mild reasons for optimism.
One is that governments in the region will relax fiscal austerity. Having tightened fiscal policy by 3 per cent of GDP since 2011, governments are expected to loosen it by 0.4 percentage points this year with tax cuts possible in Germany.
Also, one good leading indicator is not signalling big trouble. I’m talking about the growth in the M1 measure of the money stock, controlling for inflation. This has been a good predictor of output. Since 1997, the correlation between annual growth in real M1 and in industrial production in the following 12 months has been a hefty 0.5. Slowdowns in monetary growth in 1999-00, 2006-07, 2010-11 and since 2016 all led to slowdowns in output growth, while accelerations in monetary growth in 2001-03, 2008-09 and in 2012-15 all led to faster growth.
This shouldn’t be terribly surprising. If companies and households are planning on buying big-ticket items, they’ll shift their assets from illiquid forms (which aren’t part of M1) into liquid assets (which are M1). Also, if readily spendable cash is rising for any reason – because incomes are rising – some people will be tempted to spend more. Either way, monetary growth should be a predictor of output growth. Which it is.
Which is where the good news comes. The slowdown in real M1 growth seems to have levelled off since the summer, at just under 5 per cent: data from the ECB and Eurostat next week are likely to show that this stability continued into last month. What’s more, this growth is much stronger than it was going into the downturns of 2008 and 2011, when the money stock actually shrank in real terms.
None of this rules out more woes in the near term. China’s slowdown will continue to hurt Germany in particular. And it’s possible that the trade war or fears of a no-deal Brexit will intensify: the idea that governments should provide stability for business (a view shared by both Lady Thatcher and New Labour) died in 2016.
Nevertheless, it does provide reasons to hope the current slowdown will be mild and short-lived. Philip Shaw at Investec says a pick-up in the region is "more likely than not over the coming months". Although the pick-up will probably be mild, it could boost stock markets merely by cutting the risk of a recession.
