Is this the dream scenario for European economy?

It is difficult to see due to all the lockdown measures that partially paralyze daily life, but the Dutch economy is actually in pretty good shape. The slide that the euro has started makes the outlook even more rosy.

It's easy to be let down by the impact of Covid-19 on the good things in life. It is just a drop in the ocean that the curfew will start an hour later from Sunday. But you don't have to worry about the Dutch economy for the time being. According to Statistics Netherlands, unemployment remained stable in March at a very low 3,6% of the labor force. And while cafes, restaurants, amusement parks, museums and the rest of the service sector are struggling, manufacturing and trading companies are doing great business. This split does not only apply to the Dutch economy.

Industrial sector is booming, service sector not yet
This week the purchasing managers index of data collector IHS Markit came out. This company questions buyers at all kinds of companies throughout Europe about the order book, the delivery times of suppliers, the stock and much more. Based on the answers, they map out whether the economy is going to grow or shrink. This is measured on a scale from 0 to 100, with a reading of 50 indicating that economic activity is holding up exactly.

In March, this so-called PMI rose from 48,8 to 52,5. The good prospects are mainly due to the manufacturing sector. There, the PMI rose from 57,6 to 63,0. That is the highest level since the collection of these figures started in 1997. In the services sector, the PMI rose from 45,7 to 48,8. That's a nice improvement. But only when this index climbs above 50 will the European services sector start to grow again.  

The glide of the euro
The lockdown measures that have been extended or even tightened in many countries in recent days are still standing in the way of a recovery. Still, the ECB's chief economist Philip Lane sees no reason to adjust his forecast of 4% economic growth for Europe for the time being. In that forecast, it had already been taken into account that the phasing out of the lockdown measures could be delayed. What was not taken into account, however, is a significant currency tailwind for the European export sector.

Since the turn of the year, the euro has slipped slowly by 4% against the dollar. Apart from the slow economic recovery in Europe, this movement has a lot to do with what is happening in the US bond market. The interest rate for 10-year government bonds there exceeded 1,7% for the first time in more than a year. That interest rate will continue to rise as long as the economy in the United States picks up steam and the Federal Reserve keeps its promise to keep interest rates at about 2023% until 0.

Big boost
A weak euro is a big boost, especially at a time when world trade growth picks up further. This applies doubly to an open trading economy such as that of the Netherlands. Add to this the fact that, despite all the support measures, the government debt only exceeds 60%. There are therefore plenty of reasons - despite the lockdown - to look optimistically to the economic future.

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

© DCA Market Intelligence. This market information is subject to copyright. It is not permitted to reproduce, distribute, disseminate or make the content available to third parties for compensation, in any form, without the express written permission of DCA Market Intelligence.