Very weak data from the euro area (Daily analysis 31.01.2020)

The survey readings built hope, but "hard data" from the eurozone brought the market down to earth. The end of the year was markedly weaker than expected, and anxiety about the impact of the Chinese virus on the economy may kill belief in a recovery in the first part of the year. The zloty continues its decline: EUR/PLN climbs over 4.30.

It was expected to be bad, but not so much

The picture of economic recovery in the euro area is starting to look blurry. After optimistic signals from the survey indicators of economists, consumers and entrepreneurs, we have learned hard data from statistical offices, which is much less optimistic.

The French economy contracted unexpectedly by 0.1% in Q4, against expectations of growth of by 0.2%. This is the first drop in GDP in quarterly terms during Emmanuel Macron's presidency (and the first since Q2 2016). Compared to the last quarter of 2018. France grew at 0.8%, also clearly below market expectations by 0.4 pp. The data from Italy were in a similar tone. Quarterly decline in GDP by 0.3% was the biggest since 2013 (it was expected to grow by 0.1%), and in annual terms it remained unchanged (the market consensus was that it would grow by 0.3%).

The positive part of today's publications were data from Spain, where the economy grew in Q4 at 0.5% on quarterly basis and 1.8% on a yearly basis — both 0.1 pp above expectations. However, this was too little to support data for the entire euro area. According to preliminary Eurostat data, GDP increased in Q4 at a quarterly rate of 0.1% and 1.0% on a yearly basis - both 0.1pp below estimates. As a result, the euro area grew at the end of the year at its slowest pace since 2013, both in quarterly and annual terms. The stronger-than-expected economic slowdown at the end of the year underlines the problems that the eurozone economy has been struggling with throughout the year: global slowdown, mini-recession in the industrial sector and the negative impact of tariffs spat between the US and China.

In the past few days or even weeks, relatively optimistic macro data from Germany had been published. Meanwhile, the retail sales data for December published this morning have already fitted into the downward trend of today's macro readings. The drop in sales by 3.3 percent (adjusted for seasonal factors) was the largest monthly decline since 2007 (market consensus indicated a drop of 0.5%). On an annual basis, it was not better: a 0.8 percent increase in sales compared to December 2018 also turned out to be clearly below expectations at 4.5 percent.

The inflation in December was also an important addition to the dismal end-of-year economic data from the euro area. While the main reading turned out to be in line with expectations and amounted to 1.4% y/y, the much more important core index (excluding the most volatile factors) was at 1.1%. This is 0.1 pp below expectations and 0.2 pp below November's level.

Even bigger disproportion between the US and the Eurozone

Economists' expectations assume that the European Central Bank (ECB) will not raise interest rates until the end of 2021, but the lack of inflationary pressure in the region coupled with weak macro-readings increases the imbalance between the US and euro area economies. In the USA we also do not observe inflationary pressures, but inflation is clearly closer to the Federal Reserve's inflation target. In addition, the U.S. economy is growing at a faster pace — published yesterday growth of 2.1% in Q4 exceeded expectations by 0.1 percentage point.

This imbalance should maintain the relatively strong condition of the dollar as we are currently observing in relation to the euro. The EUR/USD continues to fluctuate just above the 1.10 mark. If we look at market expectations, an exchange rate of about 1.16 is expected at the end of the year (average of financial institutions' forecasts according to Bloomberg). At present, this scenario does not materialize, and although it is possible that demand for the euro against the dollar will increase later in the year, developments in the market do not give too many arguments for a weakening of the dollar, especially now that more information about the spread of the Chinese virus is coming in. They naturally increase the uncertainty in the market, which allows to keep the demand for the dollar as well as for other assets perceived as safe havens at a high level.

Nothing good for the zloty

Weak data from the Eurozone, a worsening of market sentiment in connection with the Chinese virus and, as a result, the appreciation of the dollar — all these factors have a negative impact on EM currencies, including the zloty. The Polish currency is under pressure today as it has been the whole week. The EUR/PLN pair exceeded 4.30 for the first time since 2nd December, USD/PLN fluctuates around 3.90, CHF/PLN remains above 4.00 (at approx. 4.02) and GBP/PLN on the day the United Kingdom left the EU ranks increased.

Zloty is currently primarily influenced by external factors, like other emerging country currencies. The negative conjuncture of these factors, combined with a slight miss of the (preliminary) GDP data for 2018 in Poland, is likely to keep the zloty in a weaker condition in the coming weeks, probably until the anxiety about the virus from China reaches its peak.