Periphery business cycle monitor

Summary and outlook

• The periphery was the strong region in the euro area measured in terms of economic growth in Q2. Importantly, private consumption has started to increase in these countries as the unemployment rate has fallen and lower commodity price inflation has supported real wage growth. Most periphery countries have potential for more surprises as the hard negative shock has resulted in very high pent-up demand.

• In the periphery countries, a third of the output gap is due to credit weakness. This suggests that enhanced credit growth should be very supportive for the recovery and, in light of this, the ECB’s TLTROs are very important for the economic outlook. An ABS programme would strengthen the outlook further, as periphery banks still have a low lending capacity due to low capital ratios.

• The ECB’s negative deposit rate has initiated a hunt for yield and periphery rates have declined further in particular in the 2-5Y segment. The decline in yields is also supported by a positive rating cycle. Ireland has recently been upgraded and thereby obtained its second single-A rating and we expect Portugal to obtain at least one investment grade rating this year.

Country details

• Italy is back in recession after the economy contracted 0.2% q/q in Q2 and the latest PMIs are now consistent with GDP growth around or slightly below 0% q/q in Q3. Structural reforms are much needed to obtain sustainable economic growth.

• Spanish activity continues to strengthen and especially domestic demand looks strong. Private consumption has followed the improvement in consumer confidence and higher real wage growth should continue to support consumption going forward.

• Greek GDP growth was -0.3% y/y in Q2, which is the closest to positive growth since the financial crisis kicked in. Manufacturing PMI still indicates positive yearly growth.

• The Portuguese economy expanded again in Q2 and although survey indicators have lost some momentum, they remain at high levels. There is a large amount of pent-up demand in Portugal and it seems that it will be released soon.

• Irish GDP for Q1 increased 2.7% q/q and for 2014 we look for the strongest growth rate since 2007. Composite PMI is the highest since 2000, where GDP increased by more than 10% (see Strategy: Ireland - PMIs hitting highs as growth accelerates).