Graphic Content – October: Explaining strong Eurozone growth?

Mike Riddell
Written by

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.

Trade with China supporting Eurozone manufacturing

Source: Allianz Global Investors, Bloomberg, 01/01/2013-29/09/2017. 3mma = 3 month moving average.

Investing involves risk. The value of an investment and the income from it may fall as well as rise and investors might not get back the full amount invested.

Past performance is not a reliable indicator of future results. If the currency in which the past performance is displayed differs from the currency of the country in which the investor resides, then the investor should be aware that due to the exchange rate fluctuations the performance shown may be higher or lower if converted into the investor’s local currency. The views and opinions expressed herein, which are subject to change without notice, are those of the issuer companies at the time of publication. The data used is derived from various sources, and assumed to be correct and reliable, but it has not been independently verified; its accuracy or completeness is not guaranteed and no liability is assumed for any direct or consequential losses arising from its use, unless caused by gross negligence or wilful misconduct. The conditions of any underlying offer or contract that may have been, or will be, made or concluded, shall prevail.

This is a marketing communication issued by Allianz Global Investors GmbH, www.allianzgi.com, an investment company with limited liability, incorporated in Germany, with its registered office at Bockenheimer Landstrasse 42-44, 60323 Frankfurt/M, registered with the local court Frankfurt/M under HRB 9340, authorised by Bundesanstalt für Finanzdienstleistungsaufsicht (www.bafin.de). This communication has not been prepared in accordance with legal requirements designed to ensure the impartiality of investment (strategy) recommendations and is not subject to any prohibition on dealing before publication of such recommendations. The information contained herein is confidential. The duplication, publication, or transmission of the contents, irrespective of the form, is not permitted.

Please share and like us: