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World Economy

18

OPEC Monthly Oil Market Report – October 2017

mentioned issues in the banking sector, sovereign debt levels in some Euro-zone economies may become a

re-emerging issue, if current economic improvements slow or interest rates would rise too soon or too quick

as sovereign debt levels in several economies remain high. Also, political uncertainty has risen, after

German elections did not provide a clear vote for the government and also as the independence seeking

region of Catalonia has raised economic uncertainty in Spain.

Labour market

developments continued to improve as the unemployment rate remained at 9.1% in July for

the third month in a row, marking the lowest level since 2009. However, labour market developments differ

widely within the Euro-zone. Germany’s unemployment rate fell to 3.6% in August, down from 3.7% in July,

while in Spain it was still at 17.1% in August for the third consecutive month. So far, the improving labour

market seems to have been a positive driver for inflation as the job additions supported gradually rising

wages. Nominal hourly wages and salaries increased by 2.0% in 2Q17, the latest available number.

Inflation

was backed only to some extent by these rising labour costs as it remained at 1.5% y-o-y. Core inflation –

that is, the consumer price index (CPI), excluding energy, tobacco and food – fell slightly to 1.1% y-o-y,

compared to 1.2% y-o-y in August. Both numbers must be compared with the ECB’s approximately 2%

inflation target.

While it seems more likely that inflation is rising and economic developments are improving, the

ECB

is more

likely to decide upon a reduction in monetary stimulus in the coming months, as has been indicated already.

While inflation has held up well over the past months in the Euro-zone, credit supply growth from financial

institutions to the private, non-financial sector appears to have decelerated but now also seems to have

stabilised again as it rose by 1.54% y-oy- in August. This is indeed a very important source of financing for

the Euro-zone economy as the majority of the important SMEs rely on bank financing; hence the

development of credit growth seems to support the ongoing recovery.

Industrial production

grew by 3.4% y-o-y in July, after 2.7% y-o-y in June, again improving to a significant

level.

Retail sales

growth in value terms were once again an important support factor for Euro-zone growth,

increasing by 2.8% y-o-y, slightly below 3.2% y-o-y in July. These most recent indicators remained at

considerable levels over the past months and now continue to demonstrate a healthy dynamic with ongoing

improvements in the underlying economy. These are forecast to continue in 2H17 and also to some extent in

the coming year. It remains to be seen, however, if the trend will stay as strong as in 1H17 or, as currently

expected, it will slow down somewhat.

Graph 3 - 5: Euro-zone CPI and lending activity

Graph 3 - 6: Euro-zone PMIs

The latest

PMI

indicators confirmed the ongoing improvement in the Euro-zone. The manufacturing PMI

increased to 58.1 in September, comparing to 57.4 in August. This marks the highest level on record, i.e.

since the initiation of this index back in 2012. The important PMI for the services sector, which constitutes the

largest sector in the Euro-zone improved as well as it moved to 55.8, after seeing a level of 54.7 in August.

The underlying momentum has led to an upward revision in the 2017

GDP growth

forecast for the

Euro-zone, which now stands at 2.2%, compared with 2.1% in the previous month. The 2018 GDP growth

was consequently also lifted to 1.9%, compared to the previous month’s estimate of 1.8%. Political

uncertainties, Brexit procedures, as well as monetary policies remain important factors to monitor.

-4

-3

-2

-1

0

1

2

3

-1

0

1

2

3

Sep 12

Jan 13

May 13

Sep 13

Jan 14

May 14

Sep 14

Jan 15

May 15

Sep 15

Jan 16

May 16

Sep 16

Jan 17

May 17

Sep 17

CPI (LHS)

MFI lending (RHS)

Sources: Statistical Office of the European Communities,

European Central Bank and Haver Analytics.

% change y-o-y

% change y-o-y

55.8

58.1

51

52

53

54

55

56

57

58

59

Sep 16

Oct 16

Nov 16

Dec 16

Jan 17

Feb 17

Mar 17

Apr 17

May 17

Jun 17

Jul 17

Aug 17

Sep 17

Index

Sources: IHS Markit and Haver Analytics.

Services PMI

Manufacturing PMI