It didn’t work because the eurozone’s economy is trapped in a liquidity trap. Recent developments from the manufacturing sector have provided a beholden beacon of optimism. For the first time in three years, the manufacturing sector is making a positive contribution. Second, it’s showing remarkable resilience, as all the strength is coming from the other side of the Pacific from the U.S. frontloading and inventory drawdown. Analysts caution that rising geopolitical tensions, especially in the Middle East, could pose major upside risks to derail growth.
Over the last few months, the eurozone’s manufacturing sector has been helped by U.S. frontloading and the following inventory build-down. This positive change has injected a much-needed shot in the arm to what has been a beleaguered industry. Exports to the U.S. exploded, leading much of the eurozone’s outsized growth in the first quarter. This shows the power of global demand to stimulate, inspire, and reinvigorate mainly local sectors.
Orders across the eurozone are just starting to show signs of bottoming out. This is a strong positive sign of a possible stabilization in the manufacturing sector. Yet, it’s important to note that this sector had experienced three consecutive years of losses before getting to this point. The ongoing crisis underscores just how tenuous that recovery remains. Even a modest reversal of frontloading would soon send the eurozone’s second-quarter growth into negative territory.
Recent changes to the overall economic landscape for the eurozone are more positive. Analysts are rightly fearful over the rising flames engulfing the Middle East. Taken together, these trends pose serious threats to the region’s future economic vitality. These geopolitical developments may strain key supply chains and alter trade dynamics, making an already fraught recovery process even more tenuous.
The eurozone’s present economic landscape is one of standstill, with external and internal forces pulling it in contradictory directions. Last month I wrote about how the manufacturing sector is taking off and looking like a growth leader. Doubts rooted in outside global political developments still remain a grave threat. The whole world will be looking on as this plays out. Find out how these elements—along with zero positive slippage—would affect the eurozone’s economic fortunes in the months ahead.