Periphery business cycle monitor

Summary and outlook

• Data for the periphery countries is stronger than it has been for a long time. Spain, Ireland, Portugal and Greece have potential for more surprises as the hard negative shock has resulted in very high pent-up demand. We expect private consumption to improve further as indicated by the increases in consumer confidence.

• The virtuous cycles, initiated by the ECB’s OMT programme in summer 2012, continue and are again helped by the ECB. The monetary policy easing package of negative rates and a boost to liquidity have started a search for positive yield. Later, it should also support activity through lower real rates and a weaker currency.

• Strong rebound in the periphery would improve debt sustainability significantly. If annual GDP growth is lifted by 1pp and the primary budget is improved by an additional 0.5% of GDP for the next five years, it would reduce the debt ratio in 2020 by around 10pp for each of the periphery countries. Lower government funding costs would reduce debt further but the impact would be gradual as only part of the debt will mature each year. In our view, the virtuous cycles are likely to continue.

Country details

• Italian consumer confidence has taken another big step upwards and points to positive growth in private consumption. This would support GDP growth, which was slightly negative in Q1. The unemployment rate has also started to decline in Italy.

• The Spanish economy continues to improve and after growing 0.4% q/q in Q1, PMIs suggest a fourth consecutive quarter of higher activity. Consumer confidence points to higher growth in private consumption and industrial production continues upwards.

• Greek manufacturing PMI has settled above 50 and indicates positive yearly GDP growth. Private consumption increased slightly in Q1 which was the first time since the debt crisis kick-in in 2010. The unemployment rate continues lower from a high level.

• In Portugal, the economy contracted 0.6% q/q in Q1, but it was due to a decline in government consumption and export. Private consumption increases and the improved consumer confidence indicate a continued increase.

• We expect a rebound in Irish GDP growth in Q1 (to be released on Monday). Consumer confidence points to a significant improvement in private consumption and both retail sales and industrial production trend higher. The unemployment rate has dropped sharply to around the euro average.