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Growing confidence in Europe

Economic confidence in the eurozone improved for the ninth consecutive month in January, reinforcing other recent indicators and surveys highlighting improved economic activity and increasing confidence in our overweight stance in European (excluding UK) assets.

Economic confidence, now back to 2011 levels, is the latest of a series of improving signals. These include a strengthening trend in the IFO survey of German business confidence – a good indicator of future economic output – and a preliminary estimate of growth in Spain’s fourth-quarter 2013 gross domestic product (GDP), following nine consecutive quarters of contraction.

However, while growth looks to be improving, weak lending remains an issue for the eurozone. M3 (the broadest measure of money supply) was significantly below expectations, unexpectedly slowing to an annual pace of 1% in December, down from 1.5% a month ago. This probably reflects the one-off impact of the Asset Quality Review (AQR), which has forced eurozone banks to reduce their assets by around €900bn in December to strengthen their balance sheets in advance of the European Central Bank’s (ECB’s) assessment of financial institutions.

We detect signs that credit conditions will improve later this year. The most recent ECB quarterly lending survey suggests that credit conditions are returning to normal in the eurozone, and measures to increase lending are working. Credit availability to businesses tightened marginally (a net 2% of banks said they tightened their lending), although this is significantly better than the 35% tightening at the peak of the eurozone crisis in 2012.

Switzerland also seems to be enjoying an improving economic environment. The consumption indicator, which reflects new car registrations and retail sales, increased materially from 1.40 in November to 1.81 in December. Furthermore, the KOF leading economic indicator increased to 1.98 from 1.95 a month earlier, though slightly below consensus.

These signs support our expectation of improving growth in Switzerland, which should also keep inflation in positive territory, although probably not high enough to require a rate hike this year from the Swiss National Bank.

This was posted in Bdaily's Members' News section by Coutts & Co .