(Bloomberg Opinion) -- Whisper it quietly, but the worst may be over for the euro zone economy. After months of gloom, and with analysts wondering whether Europe was heading for a recession, the industrial sector shows signs of stabilizing.
The slight revival will please the European Central Bank, which is considering whether to double down on its monetary easing as it struggles to meet its inflation target. But it would also be good news for Italy’s populist leaders, who have come under severe criticism for their economic policies. After a terrible end to 2018, the country’s industrial sector is bouncing back and is now among the star performances in the monetary union.
Official statistics showed today that industrial production in the euro zone fell by just 0.2 percent in February from the previous month, beating expectations of a 0.5 percent decline. Even better, the increase between January and December was revised up to 1.9 percent from 1.4 percent. As a result, even if industrial production were to be flat in March, it would still grow by 0.7 percent on a quarterly basis.
The industrial sector only produces a fifth of the euro zone output. But European policy makers have been especially worried about its wobbles. In a speech last month, Mario Draghi, ECB president, had noted the divergence between a resilient service sector, which is largely driven by domestic demand, and weakening manufacturing, which is more reliant on the vagaries of global trade. The fear was that a continued industrial slowdown would limit future employment and wage gains, which in turn would hit consumption and the services sector hard. “The current data suggest that [weakening] external demand has not yet spilled over significantly into domestic demand, but the risks have risen in the last months,” Draghi said.
An industrial revival would take the ECB out of an embarrassing situation. The central bank interrupted its net asset purchases at the end of 2018, on a path of gradual removal of its monetary stimulus. In March, Draghi had to change course, as he pushed back the date of the first rate hike to 2020 and unveiled a new scheme of cheap loans for banks. Policy makers are taking time to assess how severe the slowdown really is, but some investors are now wondering whether the next ECB move could be a fresh rate cut as opposed to a hike.
Two other Italians could be the big winners of an industrial comeback. Matteo Salvini and Luigi Di Maio, Italy’s populist leaders, are having to grapple with a sharp economic slowdown, as the country entered its first recession since 2013. This week, the government had to cut its growth target for 2019 from 1 percent to 0.2 percent, bringing it in line with forecasts from international institutions, including the European Commission.
Since the start of 2019, Italy’s industrial sector has been one of the fastest-growing in the monetary union, however. Industrial production rose by 0.8 percent in February from a month earlier, after a revised 1.9 percent jump in January – the largest bimonthly rise since the end of 2017. Even if industrial output stayed flat in March, this would still amount to a 1.4 percent jump quarterly.
An economic upturn at the start of the year would play perfectly into the hands of the League and 5 Star ahead of elections for the European Parliament. Five Star in particular is struggling in the polls, and could potentially end up third behind the center-left Democratic Party, which would land Di Maio in trouble. A surprise improvement in the economy would allow them to hit back at critics, including the Commission, saying that their economic policies are working after all.
Of course, it is still too early to tell whether Europe has truly turned the corner. The good data of the past two months in the euro zone and Italy could simply be a short-lived rebound, as companies rebuild the stockpiles they ran down at the end of the year. In the currency union, the renewed risk of a trade war with the U.S. could dampen output and confidence once again. In Italy, higher borrowing costs are bound to continue to weigh on economic activity – and so will the uncertainty over future tax and spending decisions.
But the outlook for the monetary union remains well open. For central bankers and anti-establishment forces, the good news may be yet to come.
To contact the editor responsible for this story: Jennifer Ryan at jryan13@bloomberg.net
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Ferdinando Giugliano writes columns and editorials on European economics for Bloomberg Opinion. He is also an economics columnist for La Repubblica and was a member of the editorial board of the Financial Times.
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