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Positive Sentiment of European Economic

Posted on the 01 September 2013 by Rachelcool01
July sees increased confidence and Eurozone stocks rise on the back of Chinese industrial output with encouraging Q2 data expected. Last month proved to be positive for the Eurozone, furthering speculation that the region may well be able to emerge from recession at some point this year, with market activity early this month suggesting that sentiment is on the upside Germany, the powerhouse of the single market, has made considerable headway recently, and is undoubtedly pulling the rest of the continent with it. Gfk consumer confidence hit 7.0, above expectations, and for the sixth month in a row. Most critically, however, it’s the highest figure Germany has seen since June of 2007. Taking into account the fact that the global economic downturn had not fully taken hold at that point, this is very encouraging. Across the board in fact, the Eurozone’s outlook appears to be positive. July’s figures for consumer, business and industrial confidence, and economic and services sentiment, were all significant improvements over the previous month. It wasn't too long ago that the President of the European Central Bank, Mario Draghi, made the claim that Europe would be able to haul itself out of recession. There was of course considerable scepticism, but in light of recent figures, many may be reconsidering their outlook. Spain has been one of the hardest hit euro countries, with a particularly weak economy, and extremely high levels of unemployment, particularly amongst the young. July’s figures have been positive however, and it looks as though the country may move out of recession imminently. Second quarter data shows that there was a 0.1 percent contraction; a revision could very easily indicate that Spain has already emerged from recession. Of course, there are no guarantees as of yet. Several countries, including Spain, are floating very close to recession, and it would not take a great deal of pressure for them to slide back under yet again. Friday saw European shares rise, encouraged in particular by the mining industry, which has been handed a lifeline by China, the world’s largest consumer of metals. China has recently seen somewhat of a decline in growth, but industrial output for July beat expectations, coming in at 9.7 percent. The world’s second largest economy also boasts a retail sales increase of 13.2 percent, along with a steadier rate of inflation. Data is due out on Wednesday, and is expected to show that the economy of the Eurozone has grown by 0.2 percent in Q2. This would be the first time that the region has emerged from recession since 2011, and is an extremely positive sign given that the US is currently the only major engine of global growth. POLICY MAKING CRITICAL Many of Europe’s fortunes will be down to policymakers however. In 2011, there had been initial signs that the economy would improve, only for the recovery to collapse. Many place the blame on the European Central Bank’s increased interest rates, which strangled credit, particularly in the hardest hit places such as southern Europe. The ECB is keen not to make the same mistake twice, as is the Bank of England. The US Federal Reserve’s monetary stimulus is currently running at a very high level, but Chairman Ben Bernanke has indicated that there are plans to taper the package later this year. Many are of the opinion that this is a good move, but the BoE and ECB are determined to ensure that any fallout do not spread to Europe and hamper recovery efforts. The suggestion of tapering this year had such an impact on the US markets that it amounted almost to actual monetary tightening. Governor Mark Carney is likely to make his position clear at the BoE August meeting, though Draghi is expected to be less forthcoming about the ECB’s exact plans. Another potential hazard for European recovery is imbalance, both on a national and continental scale. In the UK for example, the services sector is faring much better than manufacturing, and while Spain and Italy’s recessions might be coming to an end, they are still well behind the engine that is Germany. Ultimately however, the major threat to European success is within the banking sector. Banks across the continent are being urged to clean up their acts and raise funds in order to supply credit to businesses. Without credit, growth is simply being choked, and lenders aren't doing enough. The Eurozone’s asset quality review is due soon, and policymakers must take up the opportunity to improve the system if recovery is to stay on track. OUTLOOK With a recovery seemingly on track, it is down to banks and policymakers to ensure that it is not derailed. Data is certainly encouraging, but the situation is still fragile, and without careful management, further recession is still a very real risk.

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