Euro-area recession seen over as champagne kept on ice

Lending Decline

One area of stress remains corporate access to credit. Lending to companies and households across the region fell the most on record in June. A review of banks’ balance sheets to be conducted by the ECB has probably been delayed until the first quarter of 2014 as the central bank says it can’t start preparing until EU lawmakers vote on the legislation, which won’t be before September.

The review is part of a plan to strengthen the region’s financial system by building a banking union comprising ECB oversight, a single resolution mechanism for winding up failing lenders, and common rules for deposit guarantees.

In the meantime, economic performance remains patchy. An unexpected 1.4% drop in French industrial production in June underlined the government’s struggle to revive growth in the region’s second largest economy. France is also due to release data for second-quarter GDP on Aug. 14.

“Talk of an economic recovery, to say nothing about a sustainable one, when domestic demand is still contracting, government debt levels continue to surge and the economic and institutional reform agenda is unraveling, is wide of the mark,” said Nicholas Spiro, managing director of Spiro Sovereign Strategy in London. “Germany may be pulling ahead, but the bloc’s other main economies, including France, remain in dire straits.”

Improving Indicators

The euro area’s path out of recession will also be determined by conditions in major export markets such as the U.K., the U.S. and China. There, indications are improving.

In China, July industrial output rose more than expected after a larger-than-forecast rebound in exports eased concern that a credit squeeze in the world’s second-biggest economy would curb growth. The U.S. economy grew at a 1.7% annualized rate from April through June after a 1.1% pace in the first quarter.

For the whole of 2013, the ECB forecasts a contraction for the euro-area economy of 0.6%, before an expansion of 1.1% in 2014.

“There’s still some fiscal adjustment going on and that’s weighing on consumption, as well as banks in the south not being in a position to support the economy,” said Laurence Boone, chief European economist at Bank of America Merrill Lynch in London. “The consensus is for slight growth and we wouldn’t expect anything much more buoyant than that.”

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