Economic clues raise EU recovery hopes

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There are signs that Europe may be turning a corner after years of economic and financial turmoil, with the key Euribor bank-to-bank lending rate and a German business index looking solid as unemployment falls in Spain.

The Euribor rate rose slightly on Friday (26 July), easing pressure on the European Central Bank (ECB) to further loosen monetary policy, a sign that the eurozone economy may be recovering.

German business morale rose for a third straight month, indicating that the eurozone’s largest economy could post some growth by the end of the year. This was coupled by a rise in French consumer confidence, a positive economic sign for French ministers who claim that the country is pulling out of a recession.

The German Ifo business index rose from 105.9 to 106.2 in July, based on a monthly survey of about 7,000 companies.

Ifo economist Klaus Wohlrabe told Reuters that he expected German growth of 0.9% in the second quarter followed by 0.4% expansion in the two next quarters, a 0.6% rise for the year.

The industrial powerhouse had narrowly missed a recession, with growth standing at just 0.1% at the start of 2013.

"At the moment there is no indication that the economy in other eurozone countries is hitting German companies," Wohlrabe said.

Spain stabilising?

Spanish unemployment, a key issue for the struggling eurozone economy, fell by 225,000 in the second quarter of the year, the largest drop since the crisis began five years ago. This brought the number of jobless down to 5.98 million, or 26.3%, below the symbolic 6 million threshold.

The real estate meltdown left the country's banks heavily exposed to soured assets and loans, which have since weighed on their balance sheets and soaked up €42 billion of EU aid.

On Thursday, three banks including bailed out lender Bankia, reported bad debts were still rising. But they also posted big jumps in first-half profits, on lower writedowns on property assets and trading gains.

Telecoms firms Telefónica and oil major Repsol – two heavyweight Spanish firms with more exposure to foreign economies – also gave encouraging trading updates.

Supported by a central bank report earlier this week showing Spain's economy came close to stabilising in the second quarter, Thursday's run of encouraging news added weight to Prime Minister Mariano Rajoy's belief the economy should exit its two-year recession as soon as the current quarter.

"Even seasonally adjusted [unemployment] data is better than we expected, which is in line with the economic improvements forecast by the Bank of Spain," Angel Laborda, economist at think tank Funcas, said.

The British economy also looked buoyant this week, with government figures showing 0.6% growth between April and June, twice the rate of the first three months of 2013. Chancellor George Osborne said it showed Britain was “on the mend”.

Scepticism

But analysts warn that the EU still has a long way to go before its exits the crisis.

“July’s small rise in the German Ifo adds to evidence that the economy is recovering, but the recovery is likely to be modest,” said Jennifer McKeown at Capital Economics. “Recent weak hard data on trade and industrial production were a warning not to get too carried away about the speed of the recovery.”

The International Monetary Fund expressed scepticism this month about the economic recovery, saying the eurozone remained weighed down the financial crisis and continued weakness in the financial sector.

 In its annual Article IV report, a paper based on discussions between IMF economists and government and central bank officials, the organisation said the recovery remained elusive due to fragmented financial markets between countries. The report called on the ECB to ease monetary policy further, including through rate cuts if financial conditions got worse.

This September’s G20, a summit which brings together leaders of the world’s 19 largest economies and the EU, will focus on improving global confidence and supporting the global economic recovery, the European Council said on Friday.

The stated priorities are growth and employment, the completion of financial reforms and tax evasion.

The European Commission has set up a yearly cycle of economic policy coordination called the European Semester.

Each year it undertakes a detailed analysis of EU member states' programmes of economic and structural reforms and provides them with recommendations for the next 12-18 months. The European semester starts when the Commission adopts its Annual Growth Survey, usually towards the end of the year, which sets out EU priorities for the coming year to boost growth and job creation.

  • 5-6 Sept.: G20 Summit focusing on the global economic recovery

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