Market commentary: Euro area showing signs of stability

Now that the drama attributed to the Greek crisis seems to be a thing of the past, EU leaders would do well to take a break, kick back and enjoy the sun. The region’s four biggest economies are posting growth, spurred by a weaker euro and lower oil prices that are boosting consumer spending. Fears about deflation have subsided, and another year of ECB easing means the economic environment is set to be conducive to growth and stability.

This Friday we will learn how well the euro area has performed, with Q2 GDP for the region and also for Germany and France. The final July CPI (inflation) reading for the Euro area will also be closely watched as well as the French employment indicators and UK construction output.

Analysts are expecting the 19- nation bloc to have expanded for a ninth quarter, with Germany, France, Italy and Spain all growing as the recovery seems to be taking shape, albeit slowly. Euro-area gross domestic product expectedly expanded 0.4 percent in the three months through June from the previous quarter, according to the median forecast of economists in a Bloomberg survey. That would match the pace of the first quarter.

Spain is in the spot light as the country reportedly grew the most in eight years in the second quarter and is forecast to expand twice the pace of the bloc this year. This contrasts greatly to the bailout required for the banking sector in 2012; which should give hope to Greek citizens that there will be a recovery and turnaround of their fortunes.

Germany, Europe’s largest economy, is seeing consumer spending benefit from the lowest unemployment rates since the country’s reunification. The Bundesbank predicts “quite robust” growth this year and economists say it expanded 0.5 percent in second quarter. Industrial production for the month of July, however surprised to the downside, suggesting that the recovery could be slower than expected.

In Italy, where Prime Minister Matteo Renzi has promised tax cuts to support growth and make up for ground lost, the economy probably expanded 0.3 percent in the period according the consensus (Bloomberg). France may have grown for the fourth consecutive quarter.

Talks may now revolve around the impact and contribution that QE is having on the improving economies, witnessed via improving manufacturing and services indices and steady core inflation. Talk about additional measures have been mute at this point as policy makers are set to wait for the effects of the current QE program to take effect, which could well stretch further past its scheduled termination date of September 2016.

Looking at the current global picture, the turmoil emerging from China is causing disruption in parts of the financial world, with the commodities sector bearing the brunt of the impact. Economic growth is cooling in the world’s second-largest economy and the stock market also suffered a massive rout. That could weigh on third-quarter momentum in the euro area, according to economists.

Citing a slowdown in emerging and developing economies, the International Monetary Fund last month cut its global growth forecast for 2015. Yet it expects a pickup among advanced economies, with the euro area’s recovery “broadly on track, whilst stating that the “global growth” is still being held back by trade imbalances, particularly in China and Germany as the lack of domestic demand is weighing on the regions.

Still, the currency region is set for a busy period over the rest of the year, which may feature elections in Greece in addition to scheduled ones in Spain.

This article was issued by Simon Psaila, Treasury officer at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri & Co. Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.