Eurozone not as gloomy as you might think

During a week when the monetary policy committees of the Bank of England and the European Central Bank (ECB) held meetings, analysts at the Swiss-based Credit Suisse financial services holding company assured citizens of the Eurozone’s 18 member nations that the “bad news” is without substance. Due to a fall in several of Europe’s key growth indicators over recent months, concerns mounted over whether the gradual recovery since the 2011-12 recession had stalled.

Latest data

Although Credit Suisse described a tentative advancement in April, it nonetheless presented a region that is “forging ahead” in a remarkable manner. As confirmation of the April forecast, the Composite PMI results—taken from surveys of thousands of Eurozone companies—for the June-July period showed the region’s business sector expanding at the second-fastest rate in three years. In an analysis of the survey data, a chief economist explained that the area’s major economies are growing steadily, but he expressed concern for “very modest job creation” and uncertainty regarding the nature of growth over the next period.

However, according to the ECB’s results, Spain was the only major economy that grew solidly over the second quarter, with Italy and Belgium experiencing significant setbacks, while Germany—considered an economic leader on the continent this year—is expected to stagnate. Germany’s Ifo Survey, a measure of the state of business in the European powerhouse, showed a decline for the third consecutive month. In addition to the ECB’s data, the central bank’s president Mario Draghi explained to a Frankfurt press conference yesterday: “Heightened geopolitical risks, as well as developments in emerging market economies, may have the potential to affect economic conditions negatively.”

Governing Council report

The Frankfurt press conference was held following the monetary policy meeting of the ECB’s Governing Council, which was held on the same day. Draghi conveyed to the media that the ECB’s primary concern at present is mild deflationary pressure. In June the ECB announced a series of countermeasures as a response to the threat of deflation that included cutting its benchmark refinancing rate to a record low and increasing the amount of long-term loans to boost bank lending to businesses. Many experts did not expect the Council to implement any changes to this policy of quantitative easing and yesterday Forbes contributor Raoul Ruparel confirmed a lack of action in a “relatively uneventful” meeting.

The other key outcomes presented by Draghi in Frankfurt were:

• ECB interest rates will remain unchanged.
• ECB will continue to maintain the inflation rate below, but close to, 2%.
• High unemployment, among other factors, will continue to “dampen” the economy.
• Progress in fiscal consolidation and structural reforms, as well as gains in real disposable income will bolster economic growth.
• Adherence to the “Stability and Growth Pact” is important for sound public finances.
• The existing fiscal and macroeconomic surveillance framework should be maintained.

As for the UK, while the outcome of the Bank of England’s meeting will not be released for another two weeks, the nation’s business confidence remains close to an all-time high in an economy that has expanded at an annual rate of more than 3%; furthermore, unemployment continues to decline. According to the Guardian, the primary concern is the rate of bank lending, as lending has remained virtually stagnant in the UK over the six years since the start of the banking crisis.

Uncertainty ahead

While Credit Suisse’s analysis reads, “we expect reliable leading indicators of euro area growth to improve in the second half of the year,” elsewhere, economists and financial experts seem to be less sure of the path ahead for the Eurozone. It is worth noting that the Swiss company’s perspective is supported by an overall view of the situation, whereby “seasonal and external factors” are considered, consumer spending and business investment continue to be healthy, and, apart from last month, Eurozone consumer confidence has steadily increased since November 2012. On the ECB front, Draghi will be keenly observing the performance of the ongoing easing program in the critical struggle against deflation.