"The economy of the 19 countries sharing the common currency has been growing at its slowest pace since 2013. The situation on the other side of the Atlantic is quite different, the US economy is growing more than 5 times faster than in the eurozone. What does this mean for Poland and the zloty?" writes Marcin Lipka, Conotoxia Senior Analyst.
According to the European Statistical Office, the economy grew by 0.2% Q/Q in Q3. This would be the lowest growth since Q2 2014, if we take into account the rounded data published by Eurostat.
Actually, taking into account more accurate readings in Eurostat's databases, the economy of 19 countries using the same currency grew at a rate of 0.16% Q/Q, i.e. the slowest growth since Q3 of 2013. This is shocking information, especially as in 2017 the average quarterly growth reached almost 0.7%. What is happening to the European economy?
Never-ending problems and excuses
Since the beginning of 2018, GDP data from the Old Continent has been worse than expected. First, it was believed to be a matter of harsh winter and that after the first weak quarter there will be a rebound in the second quarter. However, it did not happen, but then, too, an explanation was found - strikes in France, and in addition, threats of trade war appeared.
The third quarter, in turn, was dictated by the disastrous economic ideas of the new populist government in Italy. This country, which has been struggling for years with economic problems, has been hit by the withdrawal of pension reforms, the introduction of guaranteed income and a serious conflict with the European Commission, which has significantly worsened industrial sentiment. As a result, according to Istat data, Italy was in stagnation in Q3, mainly due to shrinking production.
The German economy did not look much better between July and September. Although the economic stability of Germany is undeniable, the new regulations in the automotive sector could have caused a stagnation in Germany in Q3, as reported by the Bundesbank in its latest monthly report.
Even deeper pessimism echoes from Lithuanian data. The economy of this small eurozone country shrank by 0.4% Q/Q in Q3. This was the worst quarter since the end of 2009, just after the global financial crisis. Here, however, we have an explanation again. The central bank economist Darius Imbrasas, quoted by Bloomberg agency, said that it was the fault of drought, which damaged the harvest.
United States grows 5 times faster
In the USA, economists do not have to look for any excuses. GDP grew in Q3 by 0.86% Q/Q with the same data publication methodology used by Eurostat. As a result, the US growth was more than 5 times faster than in the eurozone. On a year-on-year (y/y) basis, growth in the US was almost twice as fast in Q3 as in the single currency, at 3.04% and 1.66%, respectively.
The gap between the USA and the eurozone is proven, for example, by data on leading indexes for industry and services. In the US, they are close to historical highs, and in the eurozone, they reach four-year lows in some sub-indexes.
A completely different direction in both currency areas is also visible in the case of industrial production. In August and September, it grew around 5% y/y in the United States. For the eurozone, the data for the previous month is not yet available, but in July and August, this increase amounted to 0.3 and 0.9% y/y, respectively.
Consequences for the currency market
The growth pace in the United States is likely to remain clearly above the eurozone readings. This may also mean that the Federal Reserve will continue to raise interest rates and it is not excluded that in Q2 of 2019 they will reach a value of about 3%.
On the other hand, there is a growing risk that the surprisingly slow development of the eurozone will lead the European Central Bank to start suggesting that interest rates could be raised later and kept negative throughout 2019.
As a result, the difference between interest rates in the USA and in the eurozone will continue to widen, which should be positive for the dollar and negative for the euro. The worse perspectives for the eurozone are also negative news for the Polish economy. GDP growth in Poland will probably be much slower than expected by the consensus of economists. This, in turn, could discourage the Polish monetary authorities from raising interest rates. There may even be opinions within the Monetary Policy Council about the need to reduce interest rates.
Such a scenario may cause further global dollar appreciation and weakening of the euro. On the Polish market, in turn, it will be more likely that the dollar will prolong the upward trend in relation to the zloty, which is slowly depreciating. As a result, before the end of the year, we may pay as much as 4 PLN for the US currency.