December 9, 2019

Report Raises Hopes for Euro Zone Recovery

The survey of purchasing managers by Markit, a data provider, suggested that Europe may be near the end of a prolonged slump that has pushed unemployment to record highs. But the recovery is likely to be slow and fragile, economists warned, and recession could persist in some countries in Southern Europe.

There were also signs on Wednesday that a credit crunch in the euro zone is easing. A survey of banks by the European Central Bank showed that credit for consumers was becoming more available for the first time since the financial crisis began in 2008. While credit for business remained tight, there were tentative signs that lending could begin to recover in coming months.

“The recession in the euro zone seems to be coming to an end after two years,” Ralph Solveen, an economist at Commerzbank in Frankfurt, said in a note to clients. But he added that the upturn could be uneven, with some indicators continuing to fall in coming months. “Activity is still dampened by numerous problems,” he wrote.

The Markit index of economic output rose to its highest level in 18 months, to 50.4 in July from 48.7 in June, according to preliminary figures. A reading above 50 is considered a sign that the euro zone economy is growing. It was the first time the index was above 50 since January 2012.

European stocks rose after release of the survey. Benchmark indexes in Frankfurt, Paris and Rome were all up more than 1 percent in early afternoon trading, while the euro gained slightly against the dollar.

The Markit index suggested that growth is picking up in Germany and that France is close to exiting recession. Manufacturing is rebounding in both countries, perhaps aided by growth in the United States economy, which has increased demand for European exports.

Daimler, the maker of Mercedes cars, said Wednesday that unit sales of passenger vehicles rose 9 percent in the second quarter of 2013, in part because of surging demand in the United States for models like its redesigned S-Class luxury sedan.

The Markit survey showed that the French economy continues to contract overall, but at a slower pace, while manufacturing is growing again for the first time since February 2012. The data suggest that the French economy, the second-largest in the euro zone after Germany, is stabilizing and could emerge from recession soon.

In Germany, managers reported solid growth in both manufacturing and services, raising hopes that the country could help haul the rest of the Continent out of its slump.

Markit did not issue separate data for other European countries, but an index of economic sentiment in the rest of the euro zone that was part of the report also showed signs of stabilization.

The various encouraging data probably mean the European Central Bank is not likely to cut the benchmark interest rate, already at a record low of 0.5 percent, when it meets next week. Unemployment, often one of the last problems to respond to economic growth, could be near its peak after reaching 12.2 percent in the euro zone, its highest ever.

Still, the region remains vulnerable. More than a quarter of all workers are unemployed in Greece and Spain. Signs of slowing growth in China, which accounts for about 25 percent of European exports, also present a risk for the euro zone.

“An economic recovery is looming, which is encouraging,” Martin van Vliet, an economist at ING Bank said in a note, “but we still doubt whether the region is about to embark on a sustainable recovery.”

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Lowering Forecast, European Central Bank Keeps Rate Steady

FRANKFURT — Defying some calls for bolder action, the European Central Bank left its benchmark interest rate unchanged on Thursday, even as it changed its economic forecast to a gloomier reading for the rest of the year.

The E.C.B. left its main rate at 0.5 percent, as expected. Despite ever more insistent calls from economists for more aggressive moves to stimulate lending in the euro zone, the E.C.B. may have decided it needed to assess the significance of a slight uptick in inflation as well as some evidence that consumers and business managers are becoming less pessimistic.

In a news conference after the announcement, Mario Draghi, the president of the E.C.B., cited “downside risks surrounding the economic outlook for the euro area.” Those, he said, include the possibility of weaker-than-expected domestic and global demand and slow or insufficient policy changes in euro zone countries.

He also said the central bank was lowering its 2013 economic forecast for the euro area, now expecting the region’s economy to shrink by 0.6 percent this year, worse than the 0.5 percent decline previously forecast. But the central bank expects growth in the euro zone of 1.1 percent next year — slightly higher than previous forecasts.

The E.C.B. had hinted in recent months the bank was considering additional unconventional measures to fix a credit crunch in southern Europe. That might even include the unprecedented step of obliging banks to pay to store their money at the central bank, rather than earning interest on it — resulting in a so-called negative deposit rate. The goal would be to force banks to put their money to work, by lending it. Mr. Draghi indicated that the central bank’s governing council, which met before he spoke, had considered that move but decided not to proceed with it.

Judging from recent speeches by E.C.B. policy makers, they are concentrating more on getting banks to deal with problem loans and other issues that may be interfering with their ability to lend.

Mr. Draghi called for euro zone policy makers to move forward with a uniform system for winding down failing banks in an orderly manner.

Marie Diron, an economist who advises the consulting firm Ernst Young, said that, while fixing weak banks was a worthy goal, it was unlikely to yield dividends for some time.

While “a cleanup of banks’ balance sheets is necessary to ensure sustained growth in the medium term, it would probably be negative for growth in the short term,” Ms. Diron wrote in an e-mail before the meeting Thursday. “It is not clear why the E.C.B. seem to have changed its focus since early May.”

Some recent economic indicators have kept alive hope that the euro zone is close to hitting bottom. Surveys have shown that businesses and consumers are a little less pessimistic than they were. And inflation has accelerated slightly, although it is still below the E.C.B. target of about 2 percent.

Many economists have urged the E.C.B. to be bolder, as unemployment remains a persistent problem, with joblessness in the euro zone at a record high of 12.2 percent. France on Thursday reported a 10.8 percent unemployment rate for the first quarter, also a record high

James Bullard, president of the Federal Reserve Bank of St. Louis, said in Frankfurt last month that the E.C.B. should consider so-called quantitative easing similar to that undertaken by the Fed — large bond purchases meant to drive down market interest rates.

It is very unusual for central bankers to put pressure on their peers so publicly. But Mr. Bullard warned that Europe was acting as a dead weight on the global economy.

“You have to be concerned,” he told an audience in Frankfurt. “The European Union as a whole is the biggest economy in the world.”

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Europe’s Small Businesses Continue to Struggle

Small and midsize companies in South European countries like Spain and Italy reported the most trouble making a profit, maintaining revenue and getting loans, according to the E.C.B. survey of 7,500 firms. Underscoring the plight of people in Southern Europe, the Spanish government said Friday that economic growth in coming years could be even worse than previously thought.

But the survey also pointed to signs of trouble in Northern Europe, further raising expectations that the E.C.B. might be all but compelled to cut its main interest rate in the coming week.

“It seems very difficult for the E.C.B. to leave the monetary policy stance unchanged,” Marie Diron, an economist who advises the consulting firm Ernst Young, said in an e-mail. Economists expect the E.C.B. to cut its benchmark rate to a record low of 0.5 percent from 0.75 percent when it meets Thursday.

U.S. economic growth continues to stand in contrast to Europe’s. The American economy sped up in the first quarter of this year, with output expanding at an annual pace of 2.5 percent, according to a U.S. Commerce Department report Friday. That number was lower than the 3 percent forecasters had been expecting, but it is a rosy picture compared with the doldrums in Europe.

Until recently, companies in Germany and other North European countries had come through the euro zone crisis relatively unscathed. But the E.C.B. survey found that a growing number of companies in Germany, the Netherlands and Austria were suffering, with more and more reporting that “finding customers” was now their biggest worry.

Even if the 17 countries in the euro zone are more and more in the same economic boat, though, tensions among their leaders are rising.

In a position paper prepared for a coming political convention, and quoted by the French newspaper Le Monde, leading members of France’s Socialist Party complained of what they said was “the selfish intransigence” of Chancellor Angela Merkel of Germany.

Ms. Merkel, the document said, “cares only for the bank depositors of the upper Rhine, the trade balance in Berlin and her electoral future.”

Ms. Merkel raised eyebrows Thursday when, in remarks to German bankers, she said that Germany should have higher, not lower, interest rates. It is considered taboo for a political leader to try to put pressure on the E.C.B.

In the E.C.B. survey, conducted in February and March and which focused on firms with fewer than 250 employees, companies throughout the euro zone reported declines in profit, except in Germany and Austria. Even in those countries, though, earnings were flat.

Along with separate data from the E.C.B. that showed a dip in bank lending last month, the survey adds to a growing body of evidence that a recovery of the euro zone economy may not materialize until next year. The figures suggest that, while fear of a breakup of the 17-member euro zone has ebbed, the currency union is at risk of long-term stagnation.

Meanwhile, a document has come to light in which Jens Weidmann, president of the German central bank, the Bundesbank, argued that some measures by the E.C.B., which are largely responsible for the decline in financial stress, would be illegal.

Mr. Weidmann made the critique in an opinion he submitted in December to the German Constitutional Court, which is considering a complaint against Germany’s participation in measures designed to keep the euro zone together. The 29-page document was confidential until Handelsblatt, a German business newspaper, published it Friday.

Mr. Weidmann wrote that the E.C.B. would violate its mandate if it bought government bonds of euro zone members on a huge scale, as it has pledged to do if needed to keep down borrowing costs for troubled countries.

The E.C.B. has not needed to buy any bonds because the promise alone has been enough to calm financial markets. In one sign of receding financial tension, bank data compiled by the E.C.B. and published Friday showed no sign of a flight by depositors following turmoil in Cyprus last month, except in Cyprus.

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Euro Zone Recession Is Reinforced by Second Quarter of Economic Decline

Gross domestic product in the euro zone fell 0.1 percent in the three months through September compared with the previous quarter, according to Eurostat, the European Union statistics agency. The downturn was slightly less severe than in the second quarter, when growth contracted 0.2 percent. But it was the fourth consecutive quarter of no growth or a decline.

Perhaps more worrisome, the data showed that Spain, Portugal and several other countries remained far from the kind of recovery that would bring increased tax revenue and help them overcome their debt problems. European leaders, who have benefited from a tenuous calm on financial markets in recent months, are likely to face additional pressure to ease the government austerity programs that have undercut growth in Southern Europe.

Economists at Nomura warned of “a depressionary environment in a growing share of the region.” In a note to clients, they said, “This negative loop has the potential to threaten the stability of the whole system.”

Some analysts had forecast a bigger decrease in output. But France registered a surprise uptick in growth and the Italian economy shrank less than expected, moderating the pace of decline across the region. Considered along with sagging factory output and business sentiment, though, the numbers Thursday reinforced expectations that the euro area as a whole could remain in recession well into next year.

“An end to the recession in the euro zone is still out of sight,” Christoph Weil, an economist at Commerzbank in Frankfurt, said in a note to clients.

Germany, which has the largest economy in the euro zone, continued to defy the crisis. Its economy grew 0.2 percent in the third quarter, slowing from a rate of 0.3 percent in the second quarter.

But data on exports, domestic demand and business sentiment indicated that growth in Germany would slow in future quarters because of falling demand from its neighbors.

A recession is often defined as two consecutive quarters of falling output, though many economists say it is important to take other data into account. But with unemployment in the euro area at 11.6 percent and nearly 26 million people out of work, few dispute that the region is in a deep downturn.

“Leading indicators suggest that the euro zone recession will broaden and deepen in the current fourth quarter,” said Martin van Vliet, an economist at ING Bank.

The European Union, which includes 17 countries in the euro zone and 10 others primarily in Eastern Europe, managed to return to growth in the quarter as several countries, including Latvia and Lithuania, recovered strongly. Growth for the bloc as a whole was 0.1 percent compared with the previous quarter, after a decline of 0.2 percent in the second quarter.

But in Western Europe the economic decline spread to Austria and the Netherlands, which had been growing in previous quarters. The Austrian economy contracted 0.1 percent, while the previously healthy Dutch economy plunged 1.1 percent, catching economists off guard.

One reason for the decline was that Dutch consumers cut back on purchases of cars, illustrating how the crisis in the European auto industry is having a broader effect. Slower export growth and a decline in construction also had an effect, according to Statistics Netherlands, the official data provider.

France grew more than analysts forecast, at 0.2 percent, because of increased exports and higher consumer spending. The Italian economy shrank 0.2 percent, which was less than expected and a less severe decline than in previous quarters. Foreign demand compensated for a decline in household spending in Italy, economists said.

There had been some signs in recent months that the euro zone, now in its third year of crisis, was beginning to stabilize. The exodus of money from Spain had stopped and borrowing costs for Spain and Italy have dropped out of the danger zone, thanks to a promise by the European Central Bank to intervene in bond markets. Exports from some of the troubled countries have risen, as companies put more emphasis on foreign markets to offset poor demand at home.

Mario Draghi, the central bank’s president, said last week that although growth would continue to slow through the end of this year, he expected a slow recovery next year. The data Thursday could raise expectations that the bank will cut its benchmark interest rate, already at a record low of 0.75 percent, when its policy makers meet next month.

But the central bank has already stretched its mandate to fight the crisis, and the burden may now fall primarily on government leaders. Germany could face added pressure to ease its insistence on drastic budget cuts by Spain, Greece, Italy and Portugal, especially after large protests in those countries this week.

Euro zone finance ministers are expected to meet next week to consider whether to release the next installment of aid for Greece, which it needs to avoid defaulting on its debt. Next month, European heads of government will hold a summit meeting to continue working on ways to make the common currency area more resilient, for example by pooling supervision of banks.

“It is essential that the period of relative calm on financial markets is preserved,” said Marie Diron, an economist who advises the consulting firm Ernst Young. “This will necessitate further quick progress on key reforms, including securing Greece’s financing and moving towards a comprehensive banking union.”

But disputes remain on the future shape of the euro zone, and there is a risk that leaders will not move fast enough. Economists said that much of the slowdown in business activity reflected uncertainty among managers, who do not want to invest until they are more confident of a recovery.

“The confidence shock will therefore continue to hinder investment and hiring decisions,” Mathilde Lemoine, an economist at HSBC, said in a note.

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Vodafone Writes Down Units in Spain and Italy

BERLIN — Vodafone on Tuesday wrote down the value of its network businesses in Spain and Italy by £5.9 billion as the British carrier struggled to weather southern Europe’s economic downturn.

The nearly $9.3 billion charge pushed Vodafone, based in Newbury, England, to a £1.9 billion loss in the six months through Sept. 30 after a £6.6 billion profit a year earlier.

The Vodafone chief executive, Vittorio Colao, blamed southern Europe’s economic woes, which has led to rising unemployment and economic stagnation in Spain and Italy, where Vodafone owns the No. 2 carriers behind Telefónica and Telecom Italia Mobile.

“Our results reflect tough market conditions, mainly in southern Europe,” Mr. Colao said.

He reiterated, however, that the company’s strategy remains one of cost-cutting and investing in faster networks to increase the sale of wireless data and offset other declines.

Vodafone, the largest telecom in Europe by market capitalization, saw its shares in London fall by as much as 4.5 percent to 159.1 pence on Tuesday afternoon.

In the six months through September, Vodafone said its total revenue fell 7.4 percent to £21.8 billion from £23.5 billion a year earlier. In southern Europe, the declines were twice as steep, with revenue falling 18.1 percent to just under £5 billion.

Revenue fell by 18.4 percent in Italy and 19.3 percent in Spain, Vodafone said. About half of the declines stemmed from the weakening of the euro against the pound, which eroded the value of Vodafone’s earnings in the single-currency bloc.

The British operator also faltered in Germany, Vodafone’s largest single market in Europe, where revenue from voice service and text messaging, its traditional source of earnings, is being increasingly eroded by free Internet-based mobile calling and smartphone message applications.

In Germany, where the company and T-Mobile are roughly equal as market leaders, revenue fell 6.5 percent to £3.9 billion.

“Germany experienced a sharp slowdown in revenue momentum as well as pressure on margins,” Jerry Dellis, an analyst in London at Jefferies International, a securities and investment bank, wrote in a note to clients.

Massive writedowns are no stranger to Vodafone, which rose to global prominence in the late 1990s through a series of aggressive mergers and acquisitions in Europe and Asia, and the purchase of a 45 percent stake in Verizon Wireless, the largest U.S. wireless carrier.

But the company has periodically overreached during its evolution, and economic downturns set off large accounting corrections to the value of its business. Twelve years ago, Vodafone wrote down the value of its business by the equivalent of $6.5 billion.

Mr. Colao, the son of an Italian carabinieri officer who took over as chief executive in 2008, has streamlined Vodafone, selling stakes in operators in France, Poland, Japan, Sweden and China. In January, he was able to coax from Verizon the first dividend payment for the Verizon Wireless venture since 2005, a windfall worth £2.9 billion to Vodafone.

On Tuesday, Mr. Colao said Vodafone would receive a further £2.4 billion dividend from Verizon Wireless before the end of this year.

Philip Kendall, an analyst at Strategy Analytics in London, said that Vodafone was faring no worse than other operators in weathering the downturn of southern Europe.

“As the No. 2 player in Spain and Italy, we feel Vodafone is holding its own quite well,” Mr. Kendall said. “I’m not suggesting all is good at those operations, just that most operators in those markets are hurting and it would be a little short-termist to get out now.”

Vodafone has explored opportunities to consolidate its operations in the region, and in February called off a merger of its Greek carrier with that of a rival, Wind Hellas. But the company is unlikely to leave the region, Mr. Kendall said.

“We wouldn’t expect major changes at Vodafone,” Mr. Kendall said. “They’ll be exploring opportunities for consolidation, and options for cutting costs, but are unlikely to be considering an exit.”

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German Bond Windfall May Be Ending With Euro Crisis

A failed German bond auction Wednesday may have brought to an end one turbulent chapter in the history of the Continent’s debt crisis, during which Berlin remained insulated from much of the fallout.

But since 2009, Germany and a handful of other countries, like the Netherlands, have benefited significantly from cheaper borrowing as investors diverted cash from riskier assets and the bonds of southern European countries to debt issued by the Continent’s fiscal hawks.

According to an estimate by Re-Define, an economic research institute in Brussels, Germany saved around €20 billion, or about $27 billion, in borrowing costs from 2009 to 2011, with another estimated €20 billion savings locked in for the future. A separate analysis, by the De Volksrant newspaper in the Netherlands, put Dutch savings at around €7.5 billion for 2009-11.

The drop in German borrowing costs — which have fallen by more than half since the crisis hit, according to Re-Define — is more than a statistical quirk because it has helped shape the way the crisis has been handled within a two-tier euro zone.

It helps explain why Germany has taken a tough line against “budget sinners” in the south like Greece, which have been virtually locked out of bond markets by high borrowing costs, and why Germany has been reluctant to create a “big bazooka” or huge bailout fund to stem the crisis. Not only have the bond markets been delivering cheap money to Germany, they are also forcing something Berlin badly wants: economic overhauls in Southern Europe.

“So in fact, in the German system, they think, ‘It’s not bad that those guys understand that they are really close to the abyss,”’ said one European official, who did not want to be identified because of the sensitivity of the issue.

The idea that those countries are learning something from the crisis, the official said, is “deep in the mentality” of Germany.

Germany has steadily objected to the creation of the one thing many observers say could temper the crisis — euro bonds backed by all 17 members of the monetary union. Issuing those bonds could drive up Germany’s own borrowing costs as it took on the risk of less-stable countries. Germany’s reluctance to issue the euro bonds has diminished somewhat, though, as the crisis intensified.

While ministers in Berlin or The Hague may worry at one level about the fate of the euro, they have so far not been under direct pressure over their country’s own borrowing.

“The crisis, to most Germans (and to a lesser extent Dutch and Finns) remains an abstract thing,” wrote Sony Kapoor, managing director at Re-Define.

Re-Define’s study notes that the yield on 10-year German government bonds, known as bunds, stood at around 4.7 percent in mid-2008. It now hovers around 2 percent, close to a record low in the 200 years for which records exist. Yields on five-year bonds are 1 percent, with two-year bonds at 0.38 percent.

“The increased demand for German bonds has been driven by both the financial and the euro crisis with investors fleeing equities, high-yield bonds and especially in the past two years also other Euro area sovereign bonds for the relative safety of German government bonds,” the report said.

In a letter this month to the Dutch Parliament, the country’s finance minister, Jan Kees De Jager, described De Volksrant’s estimate of a €7.5 billion saving in borrowing costs as “plausible,” while adding that there was “no telling how economic variables — including interest rates — would have developed without the crisis.”

Mr. de Jager pointed out that the crisis had added other costs to the government, which had increased the national debt.

Meanwhile the bond markets have, in some senses, proved an ally to Berlin, most recently by forcing from power Silvio Berlusconi, the former Italian prime minister, who presided for years over an economy with a debt level equivalent to 120 percent of gross domestic product.

While they may not be immune from the wider European downturn, Germany and the Netherlands know that the steep rise in borrowing costs for countries like Italy and Spain is forcing them to get their public finances under control and enact painful economic reforms.

“Everybody is feeling the heat apart from a small number of triple-A-rated countries,” said the European official, speaking anonymously.

While Germany saved €6 billion to €7 billion, the sum is small compared with annual German government spending of more than €300 billion, said a German government official, who did not want to be identified. Invoking government policy as the reason for not being named, the official added that it was very much in Berlin’s interest to resolve the crisis, particularly since Germany was providing the largest guarantee to the euro zone’s bailout fund. “We may be insulated in terms of interest rates,” said the official, but “our liabilities are very high.”

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Euro-Area Economy Seen Almost Stalling

The data confirms fears that the government austerity programs are taking their toll on the European economy, undercutting efforts to contain the sovereign debt crisis.

Gross domestic product in the 17-nation euro area rose 0.2 percent in the second quarter of 2011 compared to the previous quarter, according to Eurostat, the European Union statistics agency. Euro area growth was down from 0.8 percent in the first quarter.

G.D.P. growth in Germany, which has been the region’s economic locomotive, fell to 0.1 percent compared to the previous quarter, when the economy expanded 1.3 percent, the Federal Statistical Office said. Analysts had expected growth of 0.5 percent.

“It now looks like growth is slowing in core countries too,” Christoph Weil, an economist at Commerzbank, wrote in a note. “This could intensify the sovereign debt crisis in so far as the readiness and ability of countries with high credit ratings to help crisis-stricken countries will drop as a result. This could trigger a downward spiral in economic growth.”

Instead, what impetus remains in the European economy came from countries like Finland, Austria and Belgium. Even Italy, with growth of 0.3 percent compared to the previous quarter, outperformed Germany in the second quarter.

Germany’s economic rebound since the recession of 2009, driven by exports of cars, machinery and other goods to China and other emerging markets, has helped counterbalance weak growth in southern Europe. If Germany slows, the challenges posed by Europe’s sovereign debt crisis will become that much more daunting.

The German figures, which were seasonally adjusted, follow data on Friday that showed that the French economy, Europe’s second-largest, did not grow at all in the second quarter. Slower growth means that tax receipts will also fall, which will make it harder for Germany and France to support countries like Italy and Spain that are finding it increasingly difficult to borrow money at interest rates they can afford.

However, slower growth will probably also lead to lower inflation, which will give the European Central Bank more leeway to keep interest rates low and intervene in bond markets. Since last week the E.C.B. has been buying Italian and Spanish debt on the open market to hold down yields, which had risen above 6 percent, a rate that would have become eventually proved ruinous for the two countries.

The slowdown in Germany was caused by slower household consumption and construction investment, the statistics office said. In addition, imports rose faster than exports and led to a buildup of inventories.

Analysts at Commerzbank said that a warm spring meant that construction projects in Germany could begin earlier than usual, subtracting some activity from the second quarter. Without that effect growth for the quarter would have been 0.4 percent, he said.

The slowdown in Germany came despite an increase in the number of persons employed. The statistics office said 41 million people were employed in Germany, an increase of 553,000 people or 1.4 percent from a year earlier, according to preliminary figures.

The slowdown in Germany was foreshadowed by results from companies like Deutsche Bank and Siemens in recent weeks that fell short of analyst expectations, and reinforced the feeling that the extraordinarily fast pace of German growth was flattening. E.On, Germany’s largest utility, said last week that it might need to cut as many as 11,000 jobs after experiencing its first loss in a decade.

E.On attributed the loss chiefly to the government’s decision to force some of the company’s nuclear power plants to close early, but sales declines in foreign markets like Britain and Hungary also played a role.

Greece is already in recession, while growth in Spain is slowing down more than expected this year. The Portuguese government expects the economy to contract 2.3 percent this year, compared to a previous forecast of 2 percent.

However, Eurostat said that Portuguese growth was zero in the second quarter, an improvement over the decline of 0.6 percent in the first quarter.

The euro area trade surplus also improved slightly in June, to 900 million euros from 200 million euros in May, Eurostat said. Germany’s surplus of 9 billion euros remained by far the largest of any European country.

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