After being stressed for a couple of years by sovereign debt issues, high unemployment and stagnant growth, the European economy is now on the verge of recovery. The economy consisting of 27 countries is improving slowly and is expected to grow 1.4% in 2014, according to the European Commission.
The Euro zone (comprising 17 countries) economy finally emerged from its six-quarter long recession with a 0.3% growth recorded for the second quarter of 2013. This is especially true given some surprising key growth indicators. Let us have a look at the indicators in detail below:
Increasing Business Activity
Markit’s PMI index for the Euro zone rose to 50.5 in July, well above 48.7 last month and above the neutral 50.0 mark (signals expansion) for the first time since January 2012. Manufacturing production rose at the fastest pace since June 2011, as the sector registered output growth for the first time in 17 months.
The brighter outlook comes from stabilizing domestic markets with improvements in the manufacturing and service sectors. Business activity in Europe’s largest economy, Germany, rebounded in July and would aid the entire Euro zone.
Rising Consumer Confidence
Consumer confidence in the region rose to the highest level in almost two years to -17.4 in July. The number is well above the -18.8 in June and market expectation of -18.30. Among the five largest economies, Italy has enjoyed the highest consumer confidence while the Netherlands experienced weakening sentiments.
Meanwhile, the euro has also shown some strength against the dollar in the past weeks. In fact, the second-most traded currency in the world has been able to hold above the 1.30 mark against the dollar. This means that the euro is still up more than 2% against the greenback when looking at the past one-month period, suggesting that overall worries have been declining in Europe (read: Bet on the Euro with These 3 ETFs).
Unemployment across the Euro zone remained stable at 12.1% in June but jobless claim fell for the first time in more than two years, signaling some optimism in the region. In fact, Greece and Spain still have a higher unemployment rate of 26.9% and 26.3%, respectively, followed by Portugal at 17.4% and Cyprus at 17.3%. However, many other regions such as Austria, Germany, the Netherlands, Finland and Belgium have unemployment rates under 10%, indicating a good sign.
Falling Interest Rates
Meanwhile, interest rates in some of the troubled economies have fallen to a large extent. For example, interest rates in Greece have fallen drastically from 25.82% a year ago to just 10.53% currently. Similarly, Spain and Italy currently have rates of 4.67% and 4.42%, respectively.
ECB Measures Bearing Fruit
In order to avoid falling into a deeper recession, the European Central Bank (ECB) in May had cut its benchmark interest rate by a quarter percentage point to a record low of 0.50%. Additionally, it is providing ample liquidity to the Euro zone banks when needed to support the recession hit economy.