Week in review: Euro area (EA) GDP was up 0.3%qoq in Q4, better than market expectations of 0.2%qoq. Among the largest EA countries, Germany and Spain were the fastest growing. German GDP was up 0.7%qoq in Q4 against market expectations of 0.3% and after a stagnation in the spring and in the summer. The German Statistics Office reported that domestic demand, particularly private consumption and investment in construction, were the main drivers. Spanish GDP was also up 0.7% after 0.5%qoq in Q3. The strong recovery in Germany worked as a support to several European countries, including Portugal, that also benefited from the sharp recovery in its major trading partner and neighbour Spain. Portuguese GDP was up 0.5%qoq, better than the consensus of 0.3%qoq, thanks to rising export growth. Domestic demand decelerated, according to the Portuguese statistics office.
On a less upbeat note, France and Italy stagnated in Q4 after several quarters of weak growth (negative in the case of Italy). Greece GDP was down 0.2%qoq after several quarter of recovery, possibly due to the political uncertainty ahead of the elections.
Despite the positive surprise in several countries, EA growth was only about 1% annualised in Q4, still well below its 2% trend before the global financial crisis. The absence of a significant recovery in France and Italy, associated with concerns about their Governments’ debt levels and lack of structural reform is likely to continue to weight on the euro area as a whole.
Turning to politics, the standoff with Greece continued this week. The Greek Government is hoping to reach a deal that would allow it to raise a further 10bn in short-term bills and receive the ECB´s 1.8bn profits on Greek debt, as a bridge loan up to June. This should allow the Government to pursue negotiations about Greek debt restructuring with the EU and the IMF. However, the ECB is in charge of enforcing limitations on the amount of market access and has shown no sign that it wants to lift the current 15bn limit. Greece’s official lenders (EU, ECB and IMF) prefer Greece to request an extension of the current bailout programme in order to keep the funds flowing. On a cautiously positive note, Greek Finance Minister Varoufakis and its peers have agreed that Greece will start today technical negotiations with its official lenders to analyse which parts of the current programme can be extended beyond 28 February and which reforms could be scrapped.
Week ahead: The focus will remain on Greece, as finance ministers meet on Monday and Tuesday and the Eurogroup meets exceptionally on Monday with the hope of reaching a deal on Greece.
- Thursday 19 February The ECB should publish for the the first in its history the minutes of its meeting on 22 January, giving a better idea of the degree of support to the quantitative easing measures announced.
- Friday 20 February: The Flash PMI on Friday, that should give further news about whether the European recovery has continued in the new year. A value above 50 indicates a recovery and below 50 a decline in activity. The EA composite indicator was 52.6 in May