Periphery business cycle monitor

The periphery countries have shown some weakness in line with the rest of the euro area. However, measured in terms of PMIs, Ireland and Spain have been less negatively affected than the rest of the euro area and we expect the growth rate in 2014 to be the highest since the financial crisis kicked in. Portuguese leading indicators remain consistent with a continued slow recovery, whereas Italy is the weak link.
We expect private consumption to increase, as the unemployment rate trends lower and the decline in commodity prices has supported real wage growth in the periphery countries. The ECB’s monetary easing and the end of the asset quality review and stress test should support credit growth and reduce the headwind to economic activity.
Peripheral government bond markets remain nervous but volatility has come off the peak in mid-October. One reason is probably that investors have started to close the books before year-end and that liquidity in general is weak in the peripheral markets.

Country details

Italy is still lagging the progress in the other periphery countries and it looks set to remain in recession as the PMIs point to zero growth and consumer confidence has declined again. Structural reforms are much needed to obtain sustainable growth.
Spanish activity continues to be solid and GDP growth was 0.5% q/q in Q3, which should imply that growth in 2014 will be the highest since the financial crisis kicked in. We expect higher real wage growth to continue to support private consumption.
Greek manufacturing PMI has declined but remains slightly above 50 and indicates yearly GDP growth around zero. Consumer confidence has also weakened but it increased again in October and retail sales continue to trend slowly higher.
The recovery in Portugal is intact and leading indicators are consistent with a slow recovery. Hard data has come out on the weak side recently but this is volatile. Private consumption is set to contribute to GDP.
Irish PMIs remain at high levels and we expect GDP to rise 5% in 2014. Consumer confidence also continues higher and suggests higher growth in private consumption.

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