Eurozone Growth Fading

EghtesadOnline: Figures from the European Commission show that eurozone consumer confidence index fell unexpectedly in August. The commission’s initial reading on sentiment fell from -7.9 to -8.5, the lowest since April’s reading of -9.3. Economists were forecasting a reading of -7.7.

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29 August 2016

This was the third consecutive month of weakening consumer confidence in the group of countries that share the euro, news outlets reported.

Dr. Howard Archer, chief European and UK economist at IHS Markit, said: “It seems reasonable to suspect that a further appreciable drop in eurozone consumer confidence to a four-month low in August is influenced by concerns over the UK’s vote to leave the EU as well as by recent slower eurozone growth.”

According to official data published by Destatis, Germany’s economy continued to grow in the second quarter but at a slower rate after a strong start to the year. Germany’s GDP increased by 0.4% quarter-on-quarter, or an annualized rate of 1.7%. The outcome was in line with estimates but lower than the 0.7% increase seen in the first quarter.

The balance of exports and imports resulted in the positive contributions to growth in GDP. Exports rose by 1.2% while imports fell by 0.1%, which indicated lack of domestic investment.

Destatis also reported a gain of 0.2% in household spending and a 0.6% growth in government spending. On an annual basis, Germany’s GDP was up by 1.8%, marginally lower than the first quarter’s 1.9% increase.

France and Italy Slumping

Official data on Friday showed that the French economy was stagnant in the second quarter with quarter-on-quarter growth flat. This was down from 0.7% growth in the first quarter of the year.

Consumer confidence in the country however rose in August. A consumer confidence index put out by France's National Institute of Statistics and Studies had a reading of 97 in August up from 96 in July. Economists had expected the reading to remain steady at 96, reports Financial Tribune.

Meanwhile, Italy’s economic recovery unexpectedly ground to a halt in the second quarter, data released last week showed, dashing economists’ expectations of modest growth and dealing a blow to Prime Minister Matteo Renzi ahead of a crucial referendum on constitutional reform set for November.

Italy’s banking troubles, political uncertainty at home due to waning support for Renzi, and mounting geopolitical risks—including the Brexit vote—all presumably played a role in the poor performance.

Last Friday’s data, which showed flat output over the second quarter, also revealed that domestic demand provided a negative contribution to output while external demand made a positive contribution.

Angela Merkel, for example, faces federal elections in autumn 2017. But a crisis-torn Italy would not be good for Merkel's planned "All is well" election campaign.

The second largest economy of the eurozone is already weakening and more negativity from southeastern neighbors Italy would be devastating.

Mario Draghi, president of the European Central Bank, has recently called on politicians to tackle the Italian banking crisis and put in place "growth-friendly" policies.

He said: “The longer we have this in place, the less functioning the banking sector will be—and less effective the banks will be at transmitting our monetary policy.”

Loan Growth

Loans to the private sector in the eurozone edged up slightly in July, European Central Bank data showed last Friday, in welcome news for the ailing eurozone.

For the ECB, the statistics are a key indicator of the economic health of the single currency area, as borrowing is a main financing source for corporate investment which in turn should boost the eurozone's currently weak economy.

In July, approved loans rose 1.3% from a year ago, slightly faster than growth of 1.2% in June, an ECB statement said.

When certain strictly financial transactions are stripped out, the growth in loans also increased, with credit accorded to households and companies up 2% in July after a rise of 1.9% in June.

The ECB has launched a raft of policy measures to get credit flowing, most significantly a massive program to buy public sector bonds to pump liquidity into the system.