There's Room for Optimism on the Euro Economy After a Tough 2018

(Bloomberg) -- Despite a flurry of disappointing data, the euro-area economy doesn’t necessarily face a bleak winter.

Hidden behind figures that point to a protracted slowdown -- such as yet another drop in German business confidence -- are a few encouraging signs. For European Central Bank President Mario Draghi, pay gains, rising exports and receding problems in the auto industry offer solace that the New Year might see the gloom lift a little, justifying policy makers’ decision to cap stimulus this month.

Here’s a roundup of the areas to watch.

Trade

Exports to non-euro-zone countries saw the strongest gain so far this year at the start of the fourth quarter. Shipments to the U.S. and China continued to increase, suggesting the trade conflict between the two nations wasn’t having a significant impact on Europe even before those two nations agreed a 90-day truce. Chinese policies to counteract its slowdown should help the euro zone’s own growth.

Pay Gains

Euro-zone workers are seeing the strongest pay gains in a decade, an increase mentioned by Draghi when he announced the end of net bond purchases last week. Employment is also up, by 1.6 million employees in the first three quarters of the year, which means more people earning and spending.

Read more: Europe’s Newest Workers Are Older, Wiser and Living in Germany

“People say stuff like, ‘Oh, Europe’s doing terribly, Europe’s tanking,’ and that’s not how I’ve seen the data when I pierce through them. I’ve seen it as a disappointment relative to our expectations, but still roughly at trend, and Europe’s doing okay instead of doing great.” -- Nathan Sheets, chief economist at PGIM Fixed Income.

Italian Budget

A tense budget stand-off in Italy finally seems to be easing after the country secured a deal with the European Union over its spending plans -- at least for now. What’s more, Italian banks are better equipped than in the past to deal with market volatility triggered by political uncertainty. Though they remain a weak spot relative to European peers, they’ve strengthened balance sheets, limiting spillovers from the financial world into the real economy.

Cars

Germany’s car industry has struggled lately under new emissions-testing standards and a debate around potentially banning diesel vehicles. Sales remain under pressure, but demand for luxury cars in China is sparking optimism among companies like Daimler AG. The sector is “sending more positive signals, so there may be a certain rebound in the next year,” said Clemens Fuest, president of the Ifo Institute, which publishes the business-confidence survey for Europe’s largest economy.

Spanish Return

Confidence in Spain’s economy is strengthening. People who left the country after the crash in search of better jobs are returning home, convinced that momentum is strong enough to sustain the recovery and the labor market. Unlike in the euro area, retail sales and industrial production rose the second half of 2018, and quarterly growth rates are set to continue to outperform.

Oil Prices

Brent crude has lost 35 percent of its value since early October amid weaker demand and slowing global growth. Europe is a net energy importer, so the decline helps companies and consumers with lower costs, giving them more money to spend elsewhere.

--With assistance from Elisabeth Behrmann and Fergal O'Brien.

To contact the reporter on this story: Carolynn Look in Frankfurt at clook4@bloomberg.net

To contact the editors responsible for this story: Paul Gordon at pgordon6@bloomberg.net, Jana Randow

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