This is our first guest post from our new friends at Quantshare.
Recession to stay in Euro Zone
The world economy continues to underperform and all the major economic entities have reflected the same in their revised forecasts. Especially, Euro Zone economy is still ailing despite all the measures taken in the past. The outlook for the Euro Zone seems to be gloomy in the coming quarters and the GDP growth will remain in red.
According to the latest data from European Union’s statistics office, the Euro Zone GDP fell to -0.2% in Q1 2013 as compared to -0.6% in the preceding quarter primarily due to weakness in two of its major economies- Germany and France. In the current scenario, recession in Euro Zone seems to be the biggest threat to the global economy. In fact, Paris-based watchdog OECD (Organization for Economic Co-operation & Development) slashed its forecasts for the region to 0.6% contraction as compared to 0.1% contraction projected earlier.
Also, the unemployment rate is a matter of great concern as it rose to an uncomfortable record high of 12.2%. The retail sales data, which is used as a proxy for consumer demand fell more than expected. This is obvious given the high rate of unemployment, which is hurting the overall purchasing power of consumers. At the same time, the contribution from Government spending has been nil due to constrains from fiscal consolidation point of view.
On the Banking front, European Central Bank (ECB) has slashed its main refinancing rate by 25 bps to a record low of 0.5% and marginal lending rate to 1.0% from 1.5% to promote growth in the region. ECB President Mario Draghi said that the ECB’s monetary policy will remain supportive for the development of the region’s economy as long as needed. Despite these efforts from ECB, Banks have been reluctant in lending to small firms. ECB Executive Board Member Benoil Coeure has expressed his concerns over the same and said that the central bank is looking at options to improve lending to the small firms. This hitch has been more prominent in the southern countries where the recession is deepest. ECB needs to see that the policies are actually implemented in order to assist the economic growth.
Some of the key economic indicators
· Unemployment rate stood at 12.2%, which is a record high.
· Annual CPI rose to 1.4%.
· Retail sales dropped 0.5% sequentially in April & 1.1% y-o-y basis.
Although the European Commission (EC) and ECB have optimistic forecasts for the Euro Zone economy in the next few quarters, the reality seems to be quite different leaning towards a worsening situation. Both EC & ECB expect Euro Zone economy to come out of red in second half of the year, but the same seems to be grossly miscalculated and unlikely given the current situation. Things are going nowhere unless proper implementation of the agreed upon policies is ensured. As of now, Euro Zone is to remain in recession.