Europe ‘Seeking Balance Between Deleveraging and Growth’, says S&P

Financial conditions in Europe, and especially the eurozone, is likely to translate into a further year of negative growth ahead with the prospect of no more than a weak recovery in 2014 according to Standard & Poor’s.

In its latest economic research, entitled
‘Entrenched In Recession, Europe Seeks A Balance Between Deleveraging And Growth’
, the credit ratings agency (CRA) predicts that gross domestic product in the eurozone will decline by -0.5% in 2013, before a modest revival of 0.8% next year.

However, S&P notes that despite the gloomy economic indicators, the financial markets so far appear to be reacting fairly calmly to the uncertainties, such as last month’s inconclusive outcome of the
Italian general election
and recent events in

The CRA suggests that markets are heartened by signs that the so-called periphery economies might be starting to cut their current account deficits and rebalance their economies, but cautions that “rebalancing in itself might not necessarily foster economic growth”.

The report notes: “As the private and the public sectors in most countries continue to deleverage simultaneously, the main supporting factor for growth will have to come from export.

“The stronger the growth in net foreign trade, the more leeway domestic demand has to expand without compromising the overall rebalancing of the economy. On that score, not all countries appear on an equal footing.

“While Spain, Portugal and Ireland have showed a strong performance in their export sector, France and especially Italy are performing poorly. The lack of transmission of the European Central Bank’s [ECB] monetary policy to the real economy is adding to those difficulties.”

S&P says that Germany is alone among the main EU economies in showing signs of a pick-up in economic growth, following a temporary slippage in Q412 when GDP fell by 0.6%. The February IFO business index climate for the country showed its strongest monthly rise since July 2010 following three consecutive months of improvement, while the German ZEW investor’s confidence survey was also ahead of most expectations.

Elsewhere in the eurozone the picture is bleak, says the CRA. The January money and credit report from the European Central Bank (ECB) underlined the overall weakness across the eurozone. Overall credit to non-financial corporates fell by 2.5% compared with the same month a year earlier and 2.3% in December 2012. Credit contraction deepened in Spain; down 11.3% in January from the same month a year ago after showing an 11% year-on-year decline in December – although interbank transfers of assets contributed around four points of the decline. In Italy, credit contracted by 3.2% in January compared with a year ago, after a 2.6% decline in December.


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