Eurozone industrial production holds up but trade surplus under pressure
In the latest economic update, the Eurozone's industrial production shows resilience, yet the trade balance indicates significant strain due to surging energy imports. Per the full note from ing-think, production managed a modest rise of 0.1% in April, but the trade surplus plummeted from €11 billion in January to just €1.3 billion by April, primarily due to elevated oil prices. This backdrop presents a complex scenario for the euro, especially as we observe upcoming geopolitical developments that could further influence energy costs and economic output.
What the desk is arguing
The desk posits that the stagnation in the Eurozone's trade surplus, coinciding with steady industrial output, indicates an underlying vulnerability in the region's economic recovery. The slight increase in industrial production, amid external pressures, could be undermined further if energy prices continue to rise without a corresponding increase in demand for Eurozone exports.
Supporting this view, the Eurozone's PMI suggests a slowdown in demand as cost pressures escalate, hinting that any further gains in industrial production may be limited. With the ongoing tensions in the Middle East and its potential impact on energy supply and prices, the risk of further deterioration in trade balance remains palpable.
Where it sits in our coverage
Our consensus target for EUR/USD is 1.075, with a range spanning from 1.04 to 1.12. Notable firms in our analysis include: - jpmorgan: 1.10 by Mar26 - bofa: 1.04 by Mar26
The desk's assessment aligns with jpmorgan, which sees a more bullish outlook, while it diverges from bofa, indicating a significantly more pessimistic stance within the broader market context.
How other firms see it
A number of firms, including jpmorgan and citi, appear aligned in their forecasts, expecting a stabilization of the euro despite headwinds. In contrast, bofa remains skeptical, anticipating further weakness in the currency.
With dynamics such as the Eurozone's trade balance and energy prices on the table, monitoring developments in the EUR/USD will be critical, particularly as it relates to central bank policies in response to these macroeconomic signals.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Eurozone industrial production rose 0.1% in April amid geopolitical concerns.
- 02Trade surplus decreased dramatically from €11 billion to €1.3 billion due to rising energy costs.
- 03PMI indicates slowing demand and increasing input costs.
- 04Risks remain from heightened energy prices and geopolitical instability.
Market implications
Traders should keep an eye on the EUR/USD pair, particularly around the 1.075 level, as shifting energy prices and evolving geopolitical landscapes may prompt volatility. Positions should be taken with caution given the current trade surplus pressures.
Risks to this view
A significant drop in energy prices due to global supply resolutions or a sudden improvement in Eurozone demand could sharply reverse the current bearish sentiment surrounding the euro. Additionally, positive developments regarding U.S.-Iran negotiations could further complicate the outlook.
Older quick take Quick take 10:45 Eurozone industrial production holds up but trade surplus under pressure In April, production data held firm despite the headwinds from the Middle East. But the trade surplus has shrivelled as energy and other goods imports surge The eurozone trade surplus has fallen from €11bn in January to just €1.3bn in April on the back of higher oil prices Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Bert Colijn Chief Economist, Netherlands Production continues to hold up, a deal can help to keep it that way Eurozone industry has held up reasonably well so far, despite a new energy crisis unfolding. The 0.1% monthly increase in production in April marks the third in a row, nothing special, but also far from catastrophic, given the developments in the Middle East.
Growth was broad-based between consumer, capital and intermediate goods. Growth in France and Germany was flat, though, with Italy, the Netherlands and Ireland posting positive contributions. Still, the PMI for the eurozone indicates a further slowing in May as demand is under pressure and input costs increase on the back of the conflict.
At the time of writing, we’re still awaiting further details about the US-Iran deal and the reopening of the Strait of Hormuz. Clearly, this would alleviate issues for eurozone industry. But at the same time, we think the scope for improvement may be modest, with uncertainty about a structural deal still significant and continued pressure on oil prices even with the Strait open again due to pent-up demand.
The trade surplus has fallen on the back of higher energy prices… and more This also matters hugely for the eurozone trade balance. With increased energy spending due to higher oil prices, the eurozone trade surplus has fallen from €11bn in January to just €1.3bn in April. For the larger EU, the surplus has now already turned into a deficit.
Compared to April last year, we see it’s not just energy. The trade surplus for chemicals, machinery and vehicles has also fallen significantly. We have argued here that the pressure on the trade surplus is large in the short-term, but also significant in the medium-term due to a loss of competitiveness.
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