Whisper it, is the euro zone perking up?

February 26, 2015

People walk into the the Mall of Berlin shopping centre in Berlin

The drama of Ukraine and Greece has left old-fashioned economic data in the shade so far this year but, quietly, there are some signs of improvement for the moribund euro zone economy.

German GDP growth was robust in the fourth quarter of 2014, driven by domestic demand, and now Germany’s largest trade union has secured an inflation-busting pay rise – which generally sets the bar for other sectors – promising more consumer spending to come.
Spain has turned a corner and the government thinks growth could even near the heady heights of three percent this year.

Final Spanish Q4 GDP data this morning are expected to confirm quarterly growth of 0.7 percent and a report just out from GfK showed German consumer sentiment jumped to its highest level in more than 13 years heading into March as low oil prices benefited household finances.

Of course, Italy remains mired in recession, France cannot achieve lift-off and Greece’s troubles are well documented. One of the missing pieces of the jigsaw remains the lack of bank lending which has fallen for more than two years now.

January euro zone money supply data this morning will show whether that is finally changing. The European Central Bank’s imminent money-printing programme could have an effect here, even in its anticipation, although a lack of demand for credit at the rates banks are prepared to lend remains a big part of the problem.

ECB President Mario Draghi told European parliamentarians yesterday that he detected the first signs of a more positive economic outlook than was the case last year.

The bond market is certainly anticipating QE. Yields outside Greece are tumbling. Irish 10-year borrowing costs fell below 1 percent for the first time on Wednesday and Germany sold five-year debt with a negative yield, meaning investors paid to lend to Europe’s largest economy. Portuguese and Spanish bond sales were also snapped up.

The Italian Treasury will auction up to 8.75 billion euros of fixed-rate bonds and floating rate bonds linked to 6-month euribor at its regular end-month auction today. Sweden will make its first purchases under its 10 billion euros own quantitative easing programme.

French Finance Minister Michel Sapin will visit Bratislava and Vienna for talks with his Slovak and Austrian counterparts. Greece is bound to be high on the agenda.

France announced plans for fresh labour reforms on Wednesday and the European Commission granted it a new two-year delay to meet an EU deficit target along with a minor slap on the wrist to show it was not getting an entirely free pass.

Given France’s repeated failure to meet EU deficit limits, that should give Greece hope that it can eventually win some leeway on loosening its austerity commitments. Sapin told an Austria newspaper the euro zone must follow less restrictive economic policies if it wants higher levels of growth and inflation.

After winning a four-month bailout extension – despite IMF and ECB misgivings about the details of its reform programme – Athens faces an immediate funding crunch. The new Greek government admitted on Wednesday it will struggle to make debt repayments to the IMF and the ECB this year.

The euro zone and ECB have so far refused to countenance raising the limit on short-term T-bill issuance by Athens. Several billions unused from Greek bank bailout funds appear to be off limits and while the Greek government wants to use 1.9 billion euros in profits that the ECB has made on its holdings of Greek bonds, that also appears not to be on the table … at least until more concrete reform progress has been made.

Belatedly, a truce appears to be taking hold in eastern Ukraine but the country’s problems deepen in other areas. As it teeters on the edge of bankruptcy, the currency is in total freefall and President Vladimir Putin warned that Russia would halt gas supplies to Ukraine if Moscow did not receive advance payment.

Kiev sowed further confusion by unexpectedly banning most currency trading and then essaying an abrupt U-turn. U.S. Secretary of State John Kerry said additional sanctions against Russia were “teed up” should events in eastern Ukraine require a significant response.

Ghanaian President John Mahama delivers his State of the Nation speech and should cover progress of negotiations with IMF, after a source told Reuters Accra had brokered a $1 billion, 3-year deal to restore fiscal stability.

On Wednesday, Nhlanhla Nene became the first South African finance minister in 20 years to increase income tax rates, despite cutting growth forecasts for an economy beset by chronic power shortages, as he strives to rein in the budget deficit.

Egypt’s central bank meets having delivered a surprise 50 basis-point cut in January. It is expected to be on hold today.

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