Limited rebound in euro area’s corporate profitability to delay surge in investment spending

Eurozone’s recent rebound in retail sales augurs well for the currency bloc’s recovery expectations, particularly when higher domestic demand mainly drove the economic growth in 2015, while external sector lagged, according to DBS Bank. However, the rebound is seen more in volume terms as compared to the value-based trend. In 2015, euro area’s retail sales grew 2.5% y/y in volume terms, as compared with growth of 1.2% in 2014. Meanwhile, in value terms, retail sales recovery was relatively subdued, growing 1% y/y, as compared with 0.4% growth registered in 2014.

The difference in both the series implies that manufacturers/corporates prefer to keep volumes in spite of lower margins, noted DBS Bank. Input costs have received some relief from weak commodity prices, against weak demand reducing their momentum to increase output costs. The trend has been reflected by PMI price indices, added DBS Bank. Meanwhile, a narrow improvement in corporate profitability is likely to set back a surge in investment spending and a sustained improvement in job creation, noted DBS Bank.

A rebound in euro area’s retail sales indicates towards increased consumers’ disposable incomes that are stimulated by weak energy prices and low inflation, according to DBS Bank. A steady and slow drop in jobless rate has also been positive; however, it is not enough to stop inflationary concerns. In the January to March 2016 period, headline inflation decelerated to 0% from 0.2% in Q4 2015.

“With demand-side pressures non-threatening at this juncture and supply factors depressing headline inflation, the European Central Bank is likely to maintain a dovish bias and keep the door for further policy measures”, noted DBS Bank.