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Written by: Alex Dryden
Global economic data makes for grim reading. The global manufacturing Purchasing Managers’ Index (PMI), due to be released on October 1st, looks likely to be below 50 for a fifth consecutive month. If confirmed, that would be its longest continuous period in contractionary territory since mid-2012. European economies, particularly Germany, have been at the forefront of this slowdown as escalating trade tensions between the U.S. and China have seen the region get caught in the crossfire.
Exports make up 20% of GDP in the Eurozone and the decline in world trade volumes has weighed on growth. In addition, domestic political disagreements over EU budget negotiations as well as the ongoing Brexit pressures have added to economic uncertainty.
A key factor in reigniting growth is to improve loan demand within the Eurozone. As we highlight in the below chart, the demand from businesses and consumers for loans is positively correlated with European growth. This theoretically makes sense. If businesses ask for and receive a loan, they can expand operations and hire more workers, in turn driving down unemployment and further supporting growth as spending rises. This virtuous economic cycle begins with the initial demand for credit.
The European Central Bank (ECB) has cut interest rates by 0.10% to -0.50% and has restarted asset purchases in an attempt to nudge the economy in the right direction. However, there are concerns over the effectiveness of negative interest rates. Investors may want to consider reducing exposure to European financial markets during this period of heightened political, economic and policy uncertainty and wait for a clearer outlook.
