Graphic Content – October: Explaining strong Eurozone growth?
19th October 2017
Last month I mentioned how a cyclical recovery in China over the past few months was driving commodities higher, and could do the same to bond yields.
A cyclical bounce in China may also be having a material impact on the Eurozone.
The Eurozone Manufacturing Purchasing Managers Index (PMI) rose to 58.2 in September, the highest reading since February 2011. Some of this is no doubt linked to domestic recovery as exceptionally easy monetary policy boosts credit growth, investment and aggregate demand.
But the chart below suggests that the external environment – particularly that of China – may also be playing a large part. The Eurozone is a large open economy, where exports are around 45% of Gross Domestic Product (GDP) (vs 28% for UK and just 12% for the US). The dark purple line shows how the euro area’s exports to China have soared since 2016, which coincides nicely with a jump in euro area manufacturing.
Now of course correlation does not necessarily imply causation. For example, this might be nothing to do with China, but might simply be due to a cyclical recovery in global activity. So we have also included the change in exports to the US (green line), where exports to the US are around twice as large as exports to China. Export growth to the US has been very stable since early 2016, suggesting that this is not a global phenomenon. In fact of the top 10 export destinations from the Euro area, only Russia has seen a larger % increase than China over the past year.
Assuming China is playing a key role in the boom in Euro area manufacturing, the policy discussion around if, how, and when the European Central Bank (ECB) will bring an end to quantitative easing (QE) – let alone whether they will start hiking rates – is therefore likely to be heavily influenced by the direction of China’s economy over the next few years.
Source: Allianz Global Investors, Bloomberg, 01/01/2013-29/09/2017. 3mma = 3 month moving average.
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