Today’s European periphery data points are bleak
Summary: Despite all the talk of recovery in Europe, the data suggest that the improvement in Europe is uneven at best now. The core has moved into a cyclical upturn but a lot of work remains in places like Italy and Greece. Today’s data points underscore this point.
My macro outlook for Europe is positive. If ones looks at the chronology of events it is clear that both fiscal and monetary conditions are easier today than they were last summer before the OMT was released and Europe was still going through a course of painful front-loaded austerity. Moreover, the data have shown contraction at a more gradual pace within the periphery while we see accelerating growth in core countries like Germany. All of that is very positive. My call in July was that the “likely outcome here is one of recovery in Europe toward the end of 2013, with recovery coming to Greece and Portugal later. This will be followed by weak growth and political and social frustration with the pace of improvement, making the outcome unpredictable. At some point, I anticipate a flaring of yields again, testing the political will of the policy elite. And of course, I eventually expect Greece to exit the eurozone due to this outcome.”
My macro view has not changed. And while I stress the improvements, there are still problems.
For example, Marc Chandler thinks that Italy is the weak link in Europe. The country faces challenges across the board – on the political, economic, equities and sovereign bond fronts. Moreover, the data released today showed a surprising and large 1.1% contraction in industrial output in July. This has effectively doused recovery hopes. It doesn’t mean Italy won’t recover. But it does mean that the timetable is closer to the one I set out in July than the early recovery we hope for.
In Greece, the government’s 2013 primary surplus offers glimmers of hope. And the likelihood of more bailouts down the line put a floor under Greek bond prices, giving relief to investors of all types. Nonetheless, Greece is still deep in recession. July’s industrial output slumped as deflation has taken hold. Consumer prices were down 1.3% year-on-year in August. And today, we learned that the unemployment rate figures just released for June 2013 showed 27.9% unemployment, compared to 24.6% in June 2012 and 27.6% in May 2013. That’s horrific.
It is clear that the periphery is still suffering. So recovery is not a done deal. There is still the potential for policy mistakes to unravel the incipient recovery we do have. So we will have to wait and see how the data come in. In the meantime, remember that Angela Merkel, the German Chancellor, is on record saying that Greece never should have been let into the eurozone and that it was the opposition SPD’s fault they got in. Now this may just be electioneering by Merkel. But it dovetails with what I have been saying about an eventual Greek exit from the eurozone. This is not something to think about in the here and now, but it is something to keep in mind for down the line.