Stronger than expected PMI data confirm the euro a recovery is on track. Germany is leading the block, but the recession likely came to an end also in the periphery. The improvement is now explained not only by exports, but also by domestic demand…..
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Yet, so far the good news is not enough for upping our estimates.Positive news also from Italy, where the agreement between the main political forces on the electoral reformrepresents an important step forward to reduce the risk of hung parliament and political instability in case of early return to the polls.
– Industrial sector recovery driven by Germany; France lagging behind. The first set of confidence surveys in January confirm a gradual improvement of the business cycle in the euro area. The flash composite PMI jumped to 53.2, from a previous index of 52.1, stronger than consensus and a new high since June 2011. The manufacturing PMI improved by 1.1 points to 53,2. As usual in this phase of the cycle, the services index stayed on more depressed levels (51.9), although it improved compared to the previous month (51.0). Activity in the industrial sector is being supported by an acceleration in foreign demand (55.2 from 53.8) and domestic orders (55.4 from 53.1), as opposed to stable inventories of finished products at 48.8. The recovery is largely driven by Germany, where the manufacturing PMI rose to 56.3 from a previous index of 54.3, hitting a high since May 2011, and compatible with a solid acceleration in industrial activity at the start of this year. In France, the manufacturing PMI rose by 1.8 points, although at 48.8 it remains significantly lower than in Germany, but also below the levels reached in Italy and Spain in December. French industry is the weak link in this current recovery, as also hinted by the INSEE survey (based on a wider sample of companies than the MarkitPMI), which stabilized at 100, a reading compatible at best with a stagnation of industrial activity. Positive signals from peripherals. The Bank of Spain confirmed that Spanish GDP grew by 0.3% q/q at the end of 2013, building on the +0.1% q/q rise achieved over the summer months (already stronger than expected), as indicated by Finance Minister de Guindos. Support to growth came not only from exports, but also from domestic demand, and in particular from corporate investments and private consumption, in line with the recovery trend of industrial output and retail sales data. Foreign trade is estimated to have made a nil contribution (after adding to growth in the three previous quarters). The stronger than expect exit from last year leaves our forecast for Spanish GDP growth in 2014 at +0.7%, vs. +0.5% previously, after -1.2% in 2013. In Italy, the sharp rebound in industrial orders and revenues at the end of 2013 confirmed that the recovery is under way, albeit at a sluggish pace. In Portugal, data on the current account balance in the first eleven months of the year (surplus of 0.87 billion euros, vs. -3.3 billion a year earlier), and the trend of the coincident indicator of economic activity in December, outlined a stronger than expected performance in the closing months of the year. On the whole, data available to date confirm that the recession is over, and that the recovery is also extending to peripherals. What’s more, the recovery is now drive also by domestic demand. Even if we welcome the good news we caution that the data so far are consistent witha 0,2% -0,3% q/q growth over the turn of the year but are not strong enough to revise our full year GDP growth forecast. The outlook remains cautious and subject to downside risks,as the euro area is still marred by large internal imbalances, high monetary fragmentation, and dramatically high unemployment rates in peripheral countries comparedto the standards of the past 30 years. ECB President in an interview with the Swiss daily Neue Zuercheracknowledged the positive news but cautioned the recovery remains fragile.
– Positive developments came also from Italy, where the agreement reached by some of the main political forces on the electoral law represents an important step forward to reduce the risk of hung parliament and political instability in case of a return to the polling stations.
However, the current proposal still needs approval in Parliament and is therefore subject to some implementation risk (for instance, it faces opposition from within the PD). The agreement also foresees a reform of the bicameral system, which would speed up the legislative process going forward, but this requires a constitutional law and will take longer.
Appendix
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