Euro zone recovery snuffed out

August 14, 2014

A BMW logo is seen the wheel of a car in Mexico City

A glut of euro zone GDP data is landing confirming a markedly poor second quarter for the currency area.

The mighty German economy has shrunk by 0.2 percent on the quarter, undercutting the Bundesbank’s forecast of stagnation. Foreign trade and investment were notable weak spots and the signs are they may not improve soon.

France has fared little better, flatlining again in the second quarter. That has forced the French government to confront reality, saying it would miss its deficit target again this year and cutting its 2014 forecast for 1 percent growth in half. There was no mention of the 2015 goal when France’s public deficit is due to come into line with the EU’s 3 percent of GDP cap, but Finance Minister Michel Sapin said Paris would cut its deficit “at an appropriate pace”.

We already know that Italy – the euro zone’s No. 3 economy – has slunk back into recession for the third time since 2008. Spain is the outlier, having reported healthy 0.6 percent quarterly growth. It’s unlikely any of its peers are going to better that.

The GDP figure for the whole of the euro zone is due later and forecast to show barely any growth, up just 0.1 percent. Given the way the national figures are coming in, even that looks over-optimistic.

So what to do? Italy and France have led a drive to focus EU policy more on jobs and growth creation rather than cutting debt. Germany and others have shown they will only tolerate that debate up to a point.

Paris has also called on the European Central Bank to act more forcefully and weaken the euro. But the ECB’s June measures – including a new package of cheap money for banks to lend – haven’t even kicked in yet so it is highly unlikely to consider the nuclear option of QE until late in the year at the earliest. And even so, given the political and philosophical objections, it remains anything but a certainty.

However, if the ECB’s next round of forecasts, due in September, are further downgraded from the roughly 1.0 percent 2014 growth that was pencilled in last time – which they now must be – speculation about the central bank finally conceding that it has to print money is sure to grow.

There had been signs of things picking up in Q3 though inflation appears to be inching inexorably towards zero. But tough EU sanctions on Russia and an unexpectedly stiff Russian response to Western sanctions has thrown a new spanner into the works by banning imports of most food from the West. The latest survey evidence points to a sharp drop in investor morale and any choking off of investment will inevitably inflict more pain.

The UK RICS housing survey, out overnight, showed momentum behind London’s property boom appears to be fading with the Royal Institution of Chartered Surveyors’ monthly national house price balance easing in July to its weakest since February.

It now seems that wage growth – or lack of it – is the key pivot for monetary policy. Average earnings actually fell year-on-year in the second quarter, the first time the reading had turned negative in four years. The Bank of England’s quarterly inflation report cut its forecast for wage growth this year in half to 1.25 percent before picking up more strongly in 2015.

Russian President Vladimir Putin will visit annexed Crimea and address the local parliament. That feels like a moment where he might say something decisive. One way or another, with Ukrainian government forces encircling the main pro-Russian rebel stronghold of Donetsk, matters are coming to a head. Putin must decide whether to up his support for the separatists in east Ukraine or back off.

Kiev described Russia’s dispatch of an aid convoy advancing towards its border as a cynical act designed to fan a pro-Russian rebellion and said it would not be allowed to pass. However, a presidential spokesman later suggested a compromise might be found, bringing it under the control of the International Committee of the Red Cross.

An increasingly isolated Nuri al-Maliki continues to protest his removal as Iraqi prime minister. His own party and his former sponsor in Iran publicly endorsed his successor on whom hopes are pinned to create a united government and halt advancing Sunni militants who have grabbed swathes territory in the region and are pressuring Kurdish forces in northern Iraq.

France announced it was joining the United States in urgently supplying what it called “sophisticated arms” to the Kurds and EU foreign ministers agreed to break summer holidays to discuss the crisis on Friday. A U.S. official said talks were also under way with Arab countries to supply munitions.

Israel and the Palestinians renewed a truce that had largely tempered a five-week-old war, but it has got off to a shaky start with rockets from Gaza slamming into Israel and Israel retaliating with air strikes.

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