In the Euro Area, Q1 GDP growth readings were mixed: two of
the five largest countries (Germany and Spain) strongly expanded while France
stagnated and Italy contracted, capping the Euro Area growth to an unchanged
0.8 percent (q/q saar). April PMI data here suggests that industrial activity
was expanding strongly (at 54.1), while industrial production data suggests
easing momentum, slowing to 0.8 percent (3m/3m saar) in March from 1.7 percent
in February. Meanwhile, the ECB committed to a stimulus package to bolster
economic recovery and bring inflation back on target (World Bank,
2014) .
Seasonally adjusted GDP rose by 0.2% in the Eurozone (EA18)
and by 0.3% in the EU28 during the first quarter of 2014, compared with the
previous quarter, according to flash estimates published by Eurostat, the
statistics office of the European Union. In the fourth quarter of 2013, GDP
(gross domestic product) grew by 0.2% in the Eurozone and by 0.4% in the EU28 (Finfacts,
2014) .
Compared with the same quarter of the previous year,
seasonally adjusted GDP rose by 0.9% in the Eurozone and by 1.4% in the EU28 in the first quarter
of 2014, after +0.5% and +1.0% respectively in the previous quarter (Finfacts,
2014) .
The UK and Germany grew by 0.8%, Spain expanded 0.4% and
Italy contracted slightly at -0.1%. Portugal also reported a contraction at
-0.7% while Finland is back in recession with two straight quarterly dips of
0.4% (Finfacts, 2014) .
Germany
The German economy is gaining momentum. In the first quarter
of 2014, the gross domestic product (GDP) rose 0.8% on the fourth quarter of
2013 after adjustment for price, seasonal and calendar variations. The moderate
growth rate of last year (+0.4% in the last quarter of 2013) has given way to
an accelerated expansion. Destatis, the federal statistics office, also
reported, however, that a factor that contributed to the strong growth at the
beginning of the year was the extremely mild weather.
In a
quarter-on-quarter German comparison (adjusted for price, seasonal and calendar
variations), positive contributions were made only by domestic demand,
according to provisional calculations. Households and general government
increased their final consumption expenditure at the beginning of the year.
Capital formation showed a positive development, too. Fixed capital formation
in construction and in machinery and equipment was markedly up on the fourth
quarter of 2013, and building inventories also supported the GDP. Foreign
trade, however, had a downward effect on economic growth. According to
provisional calculations, exports of goods were down at the beginning of 2014,
while imports of goods were markedly up on the last quarter of 2013 (Hennigan,
2014) .
France
GDP growth was 0.0%, missing expectations for 0.1% growth.
In contrast with Germany, French consumers reduced spending
and companies cut back on investment, data showed Thursday, signalling that the
Eurozone recovery remains weak and vulnerable to setbacks.
The OECD this month cut its forecast for France to growth of
0.9% this year and 1.5% next, with only a “marginal” fall in unemployment
expected by the end of 2015, similar to the European Commission's outlook.
Spain
Spanish GDP expanded by 0.4% q/q in the first quarter of
2014, which was the best performance since the first quarter of 2008 and up
from growth of 0.2% q/q in the fourth quarter of 2013 and 0.1% q/q in the third
quarter. This followed nine quarters of contraction up to and including the
second quarter of 2013.Consequently; Spanish GDP was up 0.6% y/y in the first
quarter of 2014, which was the equal best performance (with the first quarter
of 2011) since the second quarter of 2008. Although this boosts hopes that
Spain is establishing sustainable recovery despite still facing significant
problems, the news is more troubling for Italy, where GDP dipped 0.1% q/q in
the first quarter of 2014 and so was down 0.5% y/y.
Portugal
Portugal also suffered a marked hiccup in its recovery in
the first quarter of 2014 as GDP fell 0.7% q/q. This followed three quarters of
decent growth overall between the second and fourth quarters of 2013 as Portugal
exited pronounced recession with some gusto. Consequently, Portuguese GDP was
still up 1.2% y/y in the first quarter of 2014.
Periphery
Greece continued to show signs
of emerging from recession as its y/y contraction in GDP moderated to 1.1% in
the first quarter of 2014. Greece is not releasing q/q GDP data currently and
this was the smallest y/y drop since early 2010 and down from declines of 2.3%
y/y in the fourth quarter of 2013 and 6.0% in the first quarter of last year.
However, contraction in Cyprus slowed only modestly to 0.7% q/q and 4.1% y/y in
the first quarter of 2014 from 0.8% q/q and 5.0% y/y in the fourth quarter of
2013. Finland went back into recession in the first quarter of 2014 as GDP fell
0.4% q/q and 0.8% y/y following a decline of 0.4% q/q in the fourth quarter of
2013. Estonia also suffered contraction in the first quarter of 2014, with GDP
down by 1.2% q/q and 1.5% y/y. In better news, there was growth of 0.6% q/q and
2.0% y/y in Slovakia in the first quarter, while new Eurozone entrant Latvia
achieved expansion of 0.7% q/q and 2.4% y/y. Data for Ireland and Slovenia are
yet to be released (IHS, 2014) .
Domestic Demand
No details were released of the component breakdown of
first-quarter Eurozone GDP, but it looks possible that net trade may well have
been a drag on Eurozone growth. German net trade was reported to have been
negative in the first quarter as exports of goods fell and imports rose
"markedly". In addition, net trade made a negative contribution of
0.2 percentage point to French GDP, while Portugal also suffered a
"pronounced" negative contribution from net trade (IHS, 2014) .
Domestic demand is likely to have been modestly positive
across the Eurozone in the first quarter.According to IHS consumer spending
saw moderate growth overall (given that Eurozone retail sales volumes rose 0.6%
q/q in the first quarter). Improved consumer confidence (it hit a 78-month high
in April), generally stabilising or modestly improving labour markets, and the
help to purchasing power coming from very low inflation (it averaged just 0.7%
in the first quarter) across the Eurozone probably provided some support to
consumer spending in the first quarter. Nevertheless, with the number of
Eurozone jobless still very high (the unemployment rate was still up at 11.8%
in March) and consumers' purchasing power generally constrained by low earnings
growth and tight fiscal policy, the upside for consumer spending clearly
remained limited, especially in the southern periphery countries. It is also
likely that total investment expanded overall across the Eurozone for a fourth
successive quarter following extended weakness. Business confidence generally
strengthened throughout the first quarter, building on gains seen during the
final three quarters of 2013, which is likely to have made some businesses more
prepared to invest to upgrade or replace capacity, or invest in IT, in order to
improve productivity and efficiency, and/or reduce costs. Even so, there was
still generally little need for most businesses to add capacity given generally
low capacity utilisation rates in most sectors across the Eurozone.
Meanwhile, tight lending conditions, especially for smaller
and medium-sized enterprises remained a constraint for investment. In addition,
mild weather in the first quarter of 2014 clearly supported construction
investment in a number of countries, notably Germany. It is also notable that a
build-up of inventories contributed positively to growth in Germany and,
especially, France.
Outlook
Latest survey evidence and data point overall to the
Eurozone seeing modest improvement in economic activity during the second
quarter. In particular, the composite output indicator for the Eurozone purchasing
managers' indices (PMIs) for manufacturing and the service sector compiled by
Markit Economics indicated a 10th successive month of expansion in April.
Furthermore, the index climbed to a 35-month high of 54.0 in April from 53.1 in
March and an average of 53.1 in the first quarter of 2014. However, economic
sentiment across the Eurozone suffered a modest relapse in April after reaching
a 32-month high in March, according to the European Commission. This was due to
a modest falling back in sentiment across all business sectors (especially
services and construction) outweighing a further increase in consumer
confidence to a 78-month high in April. This is likely to have been at least
partly a reflection of the fact that businesses are more worried than consumers
about the potential impact of the Ukraine crisis on economic activity. Gradual
Eurozone recovery is likely to be fuelled by improved business and consumer
confidence (supported by reduced sovereign debt tensions), accommodative
monetary policy, low inflation (just 0.7% across the Eurozone in April), and
reduced fiscal tightening. Meanwhile, labour markets have largely stabilised
across the Eurozone and are even improving marginally in some countries.
Eurozone unemployment in March was 209,000 below the April 2013 record high of
19.122 million. Also helping matters, IHS expects global growth to improve to
3.0% in 2014 and 3.6% in 2015 from 2.5% in 2013, which should support Eurozone
exports. Given this more stable and improving backdrop, businesses should
become gradually more prepared to invest, especially given growing needs to
upgrade or replace plant after extended weakness in capital spending.
Nevertheless, the Eurozone still faces significant growth
constraints. Fiscal policy is still generally restrictive, despite increased
flexibility over countries' fiscal targets, and tight credit conditions persist
in several countries amid still significant banking sector problems.
Unemployment remains elevated (the Eurozone unemployment rate was still up at
11.8% in March) and is unlikely to come down substantially any time soon, while
consumer purchasing power is limited by low earnings growth. Furthermore, the
euro's strength hinders Eurozone exporters: it hit a 30-month high of
EUR1.00:USD1.399 in early May. Moreover, the performances of the French and
Italian economies in the first quarter of 2014 reinforce concern over their
outlooks and fuel suspicion that both countries will struggle for meaningful
growth this year. Indeed, IHS expects Italian growth to be limited to 0.3% and
French growth to 0.6% in 2014. It also highlights the pressing need in both
countries to enact meaningful structural reforms. Spain also still faces
significant obstacles that are likely to limit the upside for growth for some
time to come (it is seen growing by 0.8% in 2014).
European Central Bank
Highlights
On June 5, 2014, the European Central Bank (ECB) announced
its first change in policy since November 2013. These actions included:
·
Decreasing all three policy rates:Negative
marginal deposit facility rate (-0.10%) for the first time in history; Main
refinancing rate cut to 0.15%; Marginal lending facility rate cut to 0.40%
·
Creating targeted longer-term refinancing
operations (TLTROs) in an effort to reduce interest rates in nonfinancial
markets
·
Suspending "sterilization" program of
previous asset purchase plan
·
Intensifying preparatory work for outright purchases
of asset-backed securities (ABS)
The European Central Bank finally moved to counter sluggish
growth, persistently high unemployment and the threat of deflation in the euro
zone after months of dithering. By its own standards, the measures announced
last week - which include taking a key deposit interest rate into negative
territory - are bold, even historic. But market reactions have been, well,
underwhelming. The bank's chief, Mario Draghi, may be finally doing what is
necessary, but is it enough? He himself hinted at outright quantitative easing
to come, which he has so far avoided implementing, should the new measures
prove inadequate.
The ECB's move is effectively penalising banks for not putting money to
work. Negative T-bill yields means governments will pay investors back less
than they borrowed when the paper comes due. Policymakers hope negative rates
in time will force money out of the financial system and into the real economy (Reuters,
2014) .
What the negative deposit rates mean, essentially, is that
commercial banks will be penalized for accumulating reserves rather than
loaning out all of those fresh euros into the supposed “real” economy. The
idea, at least according to the central planners at the ECB, is to force banks
to loan out more of the funds to businesses and consumers.
This is a good strategy by the ECB but the caveat here is
that despite the incentives, Banks will only lend out to businesses if they can
trust their economic viability.But the credit channel appears to be blocked, People
still don't have great confidence in the economy because growth is anaemic,
inflation is low, household debt is fairly high and unemployment is high as
well.
Critics have pointed out that the amount in deposits those
banks have put away with the central bank are not great enough for the negative
rate to make a big enough impact. And the benchmark rate cut is not likely to
make them lend significantly more than before. In truth, funding for small to
medium-sized companies remains at crisis level in the euro zone
The Keynesian/monetarist notion that monetary policy can
drive an economy persists, despite chronic failures.
Conclusion
In the Euro Area, Q1 2014 seasonally adjusted GDP was recorded at 0.2%.Germany, UK and Spain led the way the overall growth, but it was undermined by contractions in Portugal, Spain, Greece, Cyprus, Italy will stagnation in France.Domestic demand was modestly positive across the Eurozone in the first quarter with consumer spending seeing moderate growth overall.Improved consumer confidence generally stabilizing or modestly improving labour markets, and the help to purchasing power coming from very low inflation across the Eurozone probably provided some support to consumer spending in the first quarter.With the number of Eurozone jobless still very high and consumers' purchasing power generally constrained by low earnings growth and tight fiscal policy, the upside for consumer spending remained limited, especially in the southern periphery countries.Net trade was a drag on Eurozone growth while lending conditions remained tight, especially for smaller and medium-sized enterprises remained a constraint for investment.
Latest survey evidence and data point overall to the Eurozone seeing modest improvement in economic activity during the second quarter.However, economic sentiment across the Eurozone suffered a modest relapse in April likely to have been at least partly a reflection of the fact that businesses are more worried than consumers about the potential impact of the Ukraine crisis on economic activity.Gradual Eurozone recovery is likely to be fuelled by improved business and consumer confidence, accommodative monetary policy, low inflation , and reduced fiscal tightening. Meanwhile, labour markets have largely stabilised across the Eurozone and are even improving marginally in some countries. Given this more stable and improving backdrop, businesses should become gradually more prepared to invest, especially given growing needs to upgrade or replace plant after extended weakness in capital spending.
Nevertheless, the Eurozone still faces significant growth constraints. Fiscal policy is still generally restrictive, despite increased flexibility over countries' fiscal targets, and tight credit conditions persist in several countries amid still significant banking sector problems. Unemployment remains elevate and is unlikely to come down substantially any time soon, while consumer purchasing power is limited by low earnings growth. Furthermore, the euro's strength hinders Eurozone exporters.
On June 5, 2014, the European Central Bank (ECB) announced its first change in policy since November 2013 which included measures to fight the EU’s continued economic sluggishness, the head of the European Central Bank, Mario Draghi, unveiled a package of measures to prod banks to increase lending, most notably charging banks a negative interest rate for their deposits at the ECB, as well as a facility to give banks cheap four-year funds to lend to smaller businesses. Most notable of these measures is the negative interest rate on Bank deposits which is essentially, is that commercial banks will be penalized for accumulating reserves rather than loaning out all of those fresh euros into the supposed “real” economy. The idea, at least according to the central planners at the ECB, is to force banks to loan out more of the funds to businesses and consumers.This is a fairly eccentric and unprecedented strategy by the ECB but despite the incentives, Banks will only lend out to businesses if they can trust their economic viability.Currently the credit channel appears to be blocked, People still don't have great confidence in the economy because growth is anemic, inflation is low, household debt is fairly high and unemployment is high as well.Critics have pointed out that the amount in deposits those banks have put away with the central bank are not great enough for the negative rate to make a big enough impact. And the benchmark rate cut is not likely to make them lend significantly more than before. In truth, funding for small to medium-sized companies remains at crisis level in the euro zone. With precedence for unconventional monetary policy interventions already set and preparatory work for outright purchases of asset-backed securities intensifying, we could possibly see the ECB implement some form of Quantitative Easing, whether this tool is the right course of action is a matter of debate, because unlike the U.S it application might prove difficult in that the ECB will have to pick favorites on which assets to purchase. What will prove imperative will be the choice of which assets to purchase rather than the decision to act.
References
Finfacts. (2014, May 15). Eurozone GDP expanded
by an unimpressive 0.2% in Q1 2014. Retrieved June 20, 2014, from Fin
facts: http://www.finfacts.ie/irishfinancenews/article_1027681.shtml
Forbes, S. (2014). The European Central Bank
Can't Cure What Ails Europe. Retrieved June 20, 2014, from Forbes:
http://www.forbes.com/sites/steveforbes/2014/06/18/the-european-central-bank-cant-cure-what-ails-europe/
Hennigan, M. (2014, May 15). Eurozone: German GDP
growth accelerates in Q1 2014: France stuck in neutral at zero. Retrieved
June 20, 2014, from Fin Facts:
http://www.finfacts.ie/irishfinancenews/article_1027679.shtml
IHS. (2014, June 5). Eurozone Q1 GDP expansion
limited to 0.2% q/q, hitting 2014. Retrieved June 20, 2014, from IHS:
http://lis.ly.gov.tw:8080/economy_ly/data/news3.pdf
Reuters. (2014, June 17). Two-year German yields
near zero as markets brace for European Central Bank cash. Retrieved June
20, 2014, from Financial Express: http://www.financialexpress.com/news/twoyear-german-yields-near-zero-as-markets-brace-for-european-central-bank-cash/1261534
World Bank. (2014, June 7). Russia's Monthly
Economic Developments. Retrieved June 20, 2014, from World Bank:
http://www.worldbank.org/en/country/russia/brief/monthly-economic-developments
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