Europe’s Taken Something Of A Siesta This Month

Europe’s Taken Something Of A Siesta This Month
Carl Hazeley

5 months ago2 mins

What’s going on here?

Data out late last week showed that Europe’s taking a summertime nap, with a dozy downturn in economic activity.

What does this mean?

Every month the folk who manage purchases in manufacturing and services industries tell economists how busy they’ve been – and in June, activity in the eurozone’s manufacturing sector hit a speed bump and shrank. Services activity – which makes up almost three-quarters of the eurozone economy – actually swelled, but even that ultimately fell short of economists’ expectations. So sure, the economy might be on the up overall, but it’s not hitting the high notes that experts thought it would. Europe’s slowdown could be proof that the bloc’s highest interest rates in 20 years are doing what they’re supposed to, cooling things off to help bring down inflation. If so, kudos to the US Federal Reserve, which managed to pull off a similar trick stateside, but with a milder slowdown in June’s activity levels.

Eurozone PMIs

Why should I care?

For markets: Euros are out, dollars are in.

If the eurozone economy is hitting the brakes, then the European Central Bank might consider easing off on interest rate hikes. And if those rates don’t keep on climbing, well then, interest on savings in eurozone bank accounts won’t either. That could be why the value of the euro slipped nearly 1% against the US dollar: investors may be attracted to the higher rates on offer in the US, shifting their cash at Europe’s expense. And sure, 1% might not sound like much – but in the delicate world of currencies, that’s a headline-grabber.

Euro vs USD
Source: Google Finance

The bigger picture: Clues but no cigar.

Surveys like these give investors “soft” data – a sneak peek into an economy’s performance. But that's not a nailed-on account of how the country’s faring, mind you: for that, you need “hard” data – verifiable snapshots of economic growth. Soft and hard data don’t always agree, though, so savvy investors typically don’t bet the farm on the basis of surveys alone.



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