Periphery business cycle monitor

Summary and outlook

• Data for the periphery countries remain strong and Spain, Ireland, Portugal and Greece still have potential to surprise more, as the hard negative shock has resulted in very high pent-up demand. In the near term we expect domestic demand to improve.

• The ECB’s TLTRO has the potential to support credit growth in the periphery. This follows as the benchmark, which determines the potential take-up in the second stage of the TLTROs, is set such that negative net lenders can continue to deleverage but if they do it at a slower pace compared to the benchmark period, they are eligible for the TLTROs,

• Periphery spreads have tightened further and in particular the short end is going lower as the effect of ECB’s negative deposit rate is driving the hunt for yield. 2Y Portugal is now back at the level from before the concerns regarding Banco Espirito Santo hit the market. In the 10Y Portuguese yields have not reversed the latest increase, although they have started to trend downwards again. The 10Y Italy, Spain and Ireland are all trading with yields around all-time lows.

Country details

• Italian service PMI, mainly driven by domestic demand, has trended upwards during Q2 and PMIs suggest positive GDP growth in Q2. This is also reflected in retail sales, which increased 2.6% y/y in April and seem to have bottomed.

• Spanish manufacturing PMI was the highest among the biggest euro countries, see Strong Spanish manufacturing PMI in June. This suggests a fourth consecutive quarter of higher economic activity after the economy expanded 0.4% q/q in Q1.

• Greek manufacturing PMI remains above 50 and indicates positive yearly GDP growth. Consumer confidence continues to improve and in line with that retail sales trend slowly upwards and private consumption increased slightly in Q1.

• The Portuguese economy contracted in Q1 but survey and hard data suggest it will expand again in Q2. Both industrial production and retail sales trend upwards, the unemployment rate continues to decline and employment has increased.

• Irish GDP for Q1 surprised with a jump of 2.7% q/q and 4.1% y/y. Furthermore, the Q4 print was revised up from -2.3% q/q to -0.1% q/q. Leading indicators continue to signal strong growth and industrial production was up 22.3% y/y in May.