Bill Jamieson Slow euro recovery makes it tough for exporters

COMMENT

BILLJAMIESON | Executive Editor of The Scotsman

Slow euro recovery makes it tough for exporters

For British companies hoping to boost exports into the continent and the euro area in particular, this has been a difficult and frustrating time.

The business headlines at home speak of strengthening recovery, with upbeat business surveys from the Confederation of British Industry, the British Chambers of Commerce, Markit and others pointing to a continuing improvement. Most UK forecasters are now fully signed up to the ‘Three Per Cent Club’ – a growth rate that is above the UK long term trend rate and the best outcome since the onset of the global financial crisis in 2008.

But in the eurozone the story is not so encouraging. The good news is that with the figures for the first three months of the year, the eurozone has now sustained positive growth for four consecutive quarters. The year-on-year advance of 0.9 per cent from 0.5 per cent in the fourth quarter of 2013 was the best annual growth rate chalked up since the third quarter of 2011. But neither the pace of recovery, nor prospects for the rest of the year, look as encouraging as in the UK – so long regarded as the sick man of Europe.

Growth across the eurozone was pegged at just 0.2 per cent quarter-on-quarter in the three months to end March, dashing hopes that recovery was gaining momentum. This was only half the growth rate that had been widely expected, unchanged from the 2014 fourth quarter growth rate and only marginally up on the 0.1 per cent expansion seen in the third quarter.

And, not for the time, that overall figure of 0.2 per cent masked real variance across the single currency area. Germany led the way with a robust 0.8 per cent rate of expansion, helped by mild weather. Spain saw a firming recovery while France saw renewed stagnation. There was a fall back in Italy and sharp relapses in the Netherlands and Portugal.

The eurozone seems no nearer to creating that high growth, employment rising nirvana held out at its inception, inspired by the belief that a shared currency would lift all the boats across the single currency area.

Weak demand

That it has been tough for those exporting into the eurozone can be seen in the latest current account numbers. The euro area’s current account surplus has hit a record high of 2.5 per cent of GDP – almost four percentage points higher than at the trough in 2008. Weak domestic demand is the dominant factor here as import growth and investment collapsed.

The marked exception was Germany where net trade was reported to have been negative in the first quarter as exports of goods fell and imports rose ‘markedly’. Periphery countries in the euro area accounted for most of the increase in the current account balance.

Analysts at Citi group expect that the surplus will rise a bit further – to 2.9 per cent of GDP this year – and decline only gradually thereafter. “This is because we expect domestic demand (and imports) to pick up only modestly.”

Aside from Germany, Spain provided some cheer, achieving a third successive quarter of growth, with the rate accelerating to 0.4 per cent quarter-on-quarter. This raises hopes that the Spanish economy is establishing sustainable recovery even though it still faces serious problems.

By contrast, French GDP was disappointingly flat quarter-on-quarter – and might have contracted but for a strong positive contribution from inventories. This fuels concerns over the underlying state of the French economy and makes the government’s growth forecast of one per cent look ever more optimistic.

Furthermore, question marks over Italy’s recovery were raised as it disappointingly and worryingly suffered renewed mild GDP contraction of 0.1 per cent quarter-on-quarter. And the Netherlands saw GDP fall back by 1.4 per cent after growth of one per cent in the fourth quarter of 2013.

Latest survey evidence and data points overall to the eurozone seeing modest growth in the second quarter. GDP growth is set to be limited to 1.1 per cent this year, improving to 1.6 per cent next as significant constraints remain. The performances of the French and Italian economies in the first quarter fuel suspicion that they will struggle to grow by any more than 0.5 per cent. It also highlights the pressing need in both countries to enact meaningful structural reforms.

This standstill performance across the eurozone as a whole and the outlook for only modest improvement should reinforce pressures on the European Central Bank for stimulative action. What a long wait it has been – and deflation worries persist, with the risk that demand will not be strong enough to prevent inflation remaining below one per cent for a prolonged period. Since one of the ECB’s main aims is to weaken the euro, it is soon more likely than not to cut its refinancing rate from 0.25 per cent to 0.15 per cent or 0.10 per cent and even take its deposit rate marginally into negative territory (minus 0.1 per cent).

It is also possible that it could announce measures to help liquidity given latest figures showing a continuing fall in lending to businesses. However, a full dive into the pool of Quantitative Easing still looks unlikely. n