A ‘sinister’ element could be weakening Europe’s growth, Citi economist says

Key Points
  • Data released Tuesday painted a gloomy picture for Europe's growth trajectory.
  • Analysts have cited temporary factors such as bad weather for the slowdown.
  • Citi's Schulz agrees but highlights China as a possible longer-term headwind.
Workers of German steel manufacturer Salzgitter AG stand in front of a furnace at a plant in Salzgitter, Germany, March 1, 2018.
Fabian Bimmer | Reuters

Sluggish growth figures for Europe in the first three months of this year may not all be down to temporary factors, according to a Citi economist.

The economy of both the 19-nation single currency area and the 28-nation European Union (EU) grew by 0.4 percent in the first quarter of 2018. That still represents growth, but reveals a slowdown from the final three months of 2017.

In the fourth quarter of 2017, gross domestic product (GDP) had grown by 0.7 percent in the euro area and by 0.6 percent in the wider EU28. The last time euro zone growth was as tepid was in summer 2016.

Analysts have blamed the slowdown on bad weather, noting that the construction and retail sectors are usually negatively affected during cold snaps.

Other temporary headwinds being cited for the first quarter numbers include strikes, the threat of trade wars and an early Easter holiday.

Commenting on the figures, Christian Schulz, senior European economist at Citigroup, said that while seasonal factors were in play there were potentially other areas of concern.

"Unfortunately, there are some signs that something a little bit more sinister is going on," he told CNBC on Wednesday. "If you look at when confidence indicators such as PMIs (Purchasing Managers' Index) and the German IFO index peaked, it was well before the bad weather, the threat of trade wars, Easter holidays and the U.S. tax reform."

A worker stands among stacks of train carriage wheels at a plant in Maanshan, near Nanjing, China.
Qilai Shen | Bloomberg | Getty Images

Schulz said he and his fellow economists had looked for other links to Europe's growth stutter and found that one data match appeared to be the performance of China.

The team looked, in particular, at the Li Keqiang index that tracks China's rail freight volume, electricity consumption, and loans disbursed by banks.

"That index has turned down from last summer onwards and it typically has a pretty good leading relationship with German business confidence of about six months. That could explain why Germany, or manufacturing the euro zone more broadly, turned down at the end of last year," he said.

Schulz said the connection between Germany and China existed beyond just trade and that investment between the two countries was an important factor.

He added that with China tipped to account for 20 percent of Germany's future export growth, any slowdown in numbers from Beijing could immediately impact investment decisions in Europe.

Separately, euro zone manufacturing PMIs released Tuesday also suggested a slowdown in activity across Europe.

PMI data, released on a monthly basis, track factors such as output, new orders, stock levels, employment and prices across the manufacturing, construction, and retail and service sectors.

The final March reading for manufacturing PMI came in at 56.2, which represented a 13-month low.

For individual countries, multi-month lows were recorded for Germany, the Netherlands, Spain, Italy, and Greece. It should be noted that despite the slowdown all countries remained in expansion mode.

The euro, which has been losing value sharply in recent weeks, gave up almost all of its session gains following both data sets.