Arbuthnot Banking : Recent developments in the Eurozone: crisis over, at least for the time being

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Date: 7th April 2014

• The Eurozone recovery is gaining ground, after emerging from the double dip in 2013Q2. But the Commission expects fairly modest GDP growth in 2014 (1.2%) and 2015 (1.8%) and unemployment to remain very high.
• The March flash CPI inflation estimate was 0.5%, but this was probably erratically low, reflecting the timing of Easter. There is much speculation of Japanese-style deflation throughout the Eurozone but, whilst this is possible for some of the peripheral countries, it is not true for the Eurozone as a whole. Outside the periphery, wages are rising at least as fast as prices.
• The ECB left monetary policy unchanged last Thursday, though maintaining an accommodative stance and declaring it was "unanimously" willing to adopt unconventional measures. But the ECB seems in no hurry to ease policy, if it eases policy further at all.
• General Government deficits are falling. But several countries, including France and Spain, look as though they will miss their 3% deficit-to-GDP targets. Germany will strongly oppose any moves to ease austerity demands.
• Peripheral Eurozone countries have benefitted from falling long-term interest rates, as investors' concerns over the Eurozone's instability fade. Portugal is set to exit its bail-out in May and speculation that Greece will need a third bail-out package is fading.
• Spain, Portugal, Ireland and Greece have improved their competitiveness (in terms of their unit labour costs relative to Germany) over the past 3-4 years. France and Italy have not.