Periphery business cycle monitor

Summary and outlook

• We expect most euro-area periphery countries to continue to show positive GDP growth. Survey data are at relatively high levels and the improvement is also seen in hard data, where industrial production is slowly increasing while retail sales have stabilised. Hence data for the periphery are stronger than they have been in a long time.

• There is room for further progress in domestic demand. We expect private consumption to improve further as indicated by the increase in consumer confidence. Moreover, the return of business confidence is expected to result in pent-up demand in investments being unleashed.

• Peripheral sovereign yields have continued their good performance and most 10Y yields remain around historical lows. Greek yields have also performed well and Greece returned to the international capital markets with the issuance of a 5Y bond, which was met with very strong investor demand. Portugal has also held its first regular 10Y government bond auction since 2011 and it looks like the country will make a clean exit from the Troika programme during the summer.

Country details

• Italy has a low unemployment rate compared to other periphery countries but it is the only country where the upward trend continues. Moreover, insufficient labour market reforms imply that unit labour cost has not adjusted like in the other countries. However, PMIs are on an upward trend and indicate higher GDP growth.

• Spanish industrial production is improving and compared to the same month last year, it is up by 4.3%. In the past months PMIs have anchored above 50 pointing to growth around 0.5% q/q in Q1. The unemployment rate continues to slowly decline.

• Greek manufacturing PMI has declined a bit but it remains close to 50 after being on a strong uptrend during 2013. The past six months industrial production, retail sales and unemployment have moved sideways and this continues with signs of small progress.

• In Portugal unemployment in February stayed at 15.3%, which indicates a small plateau after it peaked at 17.5% last year. The trend of rising confidence continues and the trend in industrial production and retail sales is still positive.

• Irish GDP growth declined in Q4 but we expect it to pick-up again in Q1. PMIs continue to point to strong growth and both retail sales and consumer confidence suggest higher private consumption. The unemployment rate continues to decline.