On April 5th, 2017, reliable surveys of business activity, both in the US and the Eurozone, were released. The results indicated that the Eurozone economy has continued to pick up its pace whereas the momentum in the US economy might be dissipating.
The Sun Shines on the Eurozone
Over the last six months, the Eurozone has significantly picked up the pace. This is reiterated by the results released on Wednesday – business activity is now growing at its fastest pace in six years, rounding off the best quarter for the currency union’s economy since the second quarter of 2011.
The Markit Eurozone Services Business Activity Index reached its zenith after climbing to a 70-month high of 56.0 in March, up from 55.5 in the previous month. All nations covered by the survey saw increases in business activity in March, with Ireland registering the steepest pace of expansion.
The US Slowdown
Unlike the Eurozone, the results were not as positive for the US economy. Although economic growth in the US has been strong for the last six months, according to data reported by the Markit US Services PMI on Wednesday, activity in March grew at a far slower pace.
The Markit US Services Business Activity Index remained above the 50.0 mark in March, extending the current period of growth to 13 months. However, the index continued to plummet from January’s recent peak, reaching a six-month low of 52.8.
The recent growth in the Eurozone has caught investor interest. Although surveys such as the ones mentioned above only tell part of the story, the disparity between the two reports, i.e. of the US and the Eurozone, provides further evidence that Europe’s economy is improving and on the way up.
Typically, investors move their funds into economies where growth is positive because an uptick in economic activity tends to be good for companies’ profits and, consequently, their stock prices. Therefore, if signs of this continued gulf between growth in the Eurozone and the US persists, one can expect more investor activity to shift in favour of the Eurozone. In fact, one has already seen some signs of this in 2017.
In February, Blackrock began recommending European stocks and, a few days after Blackrock’s recommendation, Bank of America Merrill Lynch put out a note saying that European stocks are trading at their cheapest in four decades in comparison to US stocks. These reports follow Goldman Sachs comments earlier in the year to buy European stocks.
Soft vs. Hard Data
There is a continued disconnect between survey data and data on actual economic activity. Economists typically refer to two major data types – one that comes from sources such as sentiment surveys knows as “soft” data because it is less certain, and one that measures discrete quantities such as employment and business spending, and is called “hard” data.
For months now, the soft data has clearly suggested that the US economy is picking the rapid pace. However, this has not yet trickled through into the hard data. Historically, soft data lags behind hard data, often foreshadowing it. Hence, one should expect the hard figures to pick up the pace soon and tell the same story as the soft data. When will this happen? Only time will tell. But until then, one can expect more renewed and resurgent consumer confidence in the European economy.