On a day when market attention is focussed on events in Brussels it’s been a tough week for financial markets with significant losses across the board, as a result of uncertainty about the health of the Chinese economy.
The situation in Greece continues to move towards a deal with the bailout measures getting through the Greek parliament with opposition help. This probably means that we could see new elections in the event the Greek government loses a proposed “no confidence” vote, which has been scheduled for the day after the repayment to the ECB on August 20th.
With the focus now moving back to Brussels and the Eurogroup meeting the focus now moves to the gap between the German position of no debt reductions, and the IMF and EU position that restructuring is required, with the IMF insisting on progress before they sign up to any new program.
The bigger concern remains the matter of economic growth and while there have been bright spots with Spain and Greece beating expectations for Q2 GDP, Spain on the back of a tourist boost due to the problems in Greece and Tunisia, while Greece’s economy probably did well as a result of brought forward spending, over concerns about deposit haircuts and capital controls as the debt talks played out.
Apart from this, Q2 has come in below expectations, with France disappointing in Q2 as the economy stagnated, a sharp drop from the consumer spending inspired 0.7% in Q1.
The Dutch economy saw growth of 0.1% in Q2, below expectations and also down from 0.6% in Q1.
Italy came in at 0.2%, down from 0.3% in Q1, while unemployment continues to rise.
More worryingly Germany also come in short at 0.4%, but did improve from Q1, but even here this belays a wider worry, despite record low unemployment, about the wider health of the German economy.
As probably the most efficient economy in Europe the failure to post significantly better numbers is particularly concerning given the fact that the euro remains at its lowest level for years, while the fiscal boost of lower oil and food prices doesn’t appear to be having any significant trickledown effect, and is likely to keep inflation at record lows for the foreseeable future.
Today’s final CPI numbers for July point to a continued weak inflationary environment with prices falling 0.6% in July annualised 0.2%, unchanged from 0.2% in June.
These GDP numbers also point to a continued divergence between countries like France and Italy where reforms remains particularly difficult to implement and Germany and Spain where GDP is above the EU average, which came in at 0.3%.
With China also showing signs of slowing down, and the recent earnings season pointing to slower demand into H2 from important company bellwethers like Bay.Motoren Werke AG ST (LONDON:0O0U), Porsche Automobil Holding VZO (XETRA:PSHG_p), Daimler AG (XETRA:DAIGn) NA O.N. (LONDON:0NXX), LVMH Moet Hennessy Louis Vuitton SA (LONDON:0HAU) and Burberry Group PLC (LONDON:BRBY), the concern is that this is as good as it gets for Europe, given the slow pace of reform.
This slowdown also reinforces ECB President Mario Draghi’s persistent refrain that growth without reforms will very soon run out of road, though it will more than likely keep the ECB’s policy stance loose beyond September next year.
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