The worst might be over for the eurozone’s industrialists. Official figures next week could show that although German industrial production fell in the fourth quarter of last year, it ended last year higher than it was in the summer. This would be roughly consistent with last week’s purchasing managers’ surveys, which showed the rate of decline in manufacturing to be at a nine-month low.
Signs of stability in the eurozone are helping the UK. Purchasing managers here report that the rate of decline in manufacturing is also at a nine-month low.
This reflects the fact that politicians are no longer doing quite so much damage to the economy. The 'phase one' trade deal between China and the US and some greater clarity about Brexit have reduced uncertainty slightly, and so encouraged a few companies to unfreeze hiring and investment plans.
Nobody, though, thinks this is the start of a strong bounceback. Bert Colijn at ING says the chances of one are “slim”. And Investec’s Ryan Djajasaputra expects real economic growth this year to be only slightly stronger than last year’s, at 1.3 compared with 1.2 per cent.
The European Central Bank (ECB) shares this downbeat view. Its president, Christine Lagarde, said last week that she expects growth this year to be “similar to rates observed in previous quarters”.
Monetary growth is telling the same story. Ever since the inception of the euro, annual growth in the M1 measure of the money stock has been a good lead indicator of industrial production. Although this growth has accelerated in the past 12 months, from under 7 per cent to over 8 per cent now, it is still well shy of the double-digit growth rates that have heralded strong output growth in the past.
One reason for this is that while policy uncertainty has diminished slightly, it has by no means gone away. There are still huge uncertainties about UK-EU trade rules after 2020, and the threat of a renewed outbreak of trade tensions between the US and EU or China.
In fact, growth might not be strong enough to raise inflation quickly. Mr Djajasaputra expects the ECB to cut interest rates into even more negative territory later this year.
ECB research suggests that negative rates are not as ineffective at stimulating the economy as some economists believe, but it thinks that other policies are also needed. Ms Lagarde said last week that an easing of fiscal policy in northern Europe “would certainly help”.
All this matters for even the most parochial of UK investors. There has for years been a good correlation between annual growth in eurozone industrial production and annual changes in the All-Share index – of 0.54 since 1997, with each percentage point of higher production growth associated with a 1.7 percentage point increase in equity returns. This is partly because eurozone output growth is highly correlated with global growth, which in turn strongly influences investor sentiment. With the eurozone likely to grow only slowly this year, this suggests that UK equities will rise only moderately.
