Like all other markets, Europe was impacted by the China crisis in August and September particularly as Germany is a major exporter to China.
German car manufacturer Volkswagen was a major distraction to markets as it has been involved in one of the biggest corporate scandals in recent years. Volkswagen share price lost 43% in September alone, following news that the company had fitted its diesel cars with defeat device software that cheat emissions tests.
Despite the uncertainties over global demand and a Chinese slowdown, economic data from Europe proved that the recent outlook was improving. Industrial production rose by 1.9% in Q3, twice the rate economists had expected. The PMI index continues to post positive indications with manufacturing orders rising.
In October, Eurozone inflation returned to a positive 0.1% after recent deflation. The drop in energy costs is held responsible for the -0.1% deflation rate across the Eurozone in September. Fortunately, core inflation remained stable at 0.9% over the second half of the year.
This ongoing level of anaemic inflation has pushed the ECB into extending its monetary stimulus programme beyond September 2016 for a further six months to March 2017. Mario Draghi stated “we have always said that our bond purchases would run beyond September 2016 in case we do not see a sustained adjustment in the path of inflation”
The demand and supply of credit across the Eurozone was limited because of bank re-capitalisation and restrictions to lending between 2011 and 2014. This lack of credit created a second credit crunch in Europe which caused a drag on growth compared to other economies. This situation has now ended with European banks having the full support of the ECB to fulfil their lending capacity.