The Citi Eurozone economic surprise index has been negative since the spring but the balance of news may now improve, based on an expected revival in global activity and respectable narrow money trends. Growth, however, will probably lag other regions.

The industrial sector has lost momentum since early 2014. The new orders component of the manufacturing purchasing managers’ survey declined steadily between January and June, though remains in expansion territory. Industrial output fell by 1.1% in May to stand 1.0% lower than six months earlier*.

The slowdown mainly reflects global trends. Six-month growth of global industrial output has fallen since November 2013, reaching an 11-month low in May. In addition, the euro trade-weighted exchange rate has been stable at a strong level, while real money expansion has been lower in the Eurozone than in the US / UK, suggesting less of a cushion from expanding domestic demand.

Global real money trends and leading indicators, however, are signalling a near-term pick-up in activity – see previous post. US and Chinese purchasing managers’ new orders indices have strengthened and typically lead the Eurozone measure – see first chart. Equity analysts’ earnings forecast revisions, which correlate with the new orders measure, have recovered – second chart.

Eurozone real narrow money expansion, which signalled the 2011-12 recession and subsequent recovery, has fallen but remains at a level historically consistent with moderate economic growth – third chart. The latest reading, for May, predates the ECB’s recent easing package. The last ECB quarterly bank lending survey, conducted in April, reported that SME credit conditions were expected to loosen further, also suggesting respectable output prospects – fourth chart**. (The next survey is scheduled for release on 30 July.)

Are current banking problems in Portugal symptomatic of monetary / economic deterioration across the periphery? Country narrow money data actually show relative strength in Portugal recently but weakness in Ireland and Greece – fifth chart. Real money is growing moderately in Italy and Spain, suggesting limited downside economic risk.

*May weakness was probably exaggerated by holiday effects, which should unwind in June.