Ruth Lea, economic adviser to the Arbuthnot Banking Group, sees Cyprus continuing to play the role of a thorn in the Eurogroup's side, amid ongoing concerns over the pace of eurozone economic recovery.
The eurozone: more economic gloom
Meanwhile the eurozone economy looks grim, as competitiveness problems and austerity packages drag down growth. Concerning austerity programmes the OECD has recently released estimates for the impact of the fiscal consolidation programmes for key countries. The OECD defines fiscal consolidation as comprising the concrete policies (both spending and revenues) aimed at reducing government deficits and debt accumulation. Deficits can, of course, be reduced by economic growth leading to more revenues and less spending, but these effects have been excluded.
Recent economic indicators have been uniformly negative. The Eurozone’s unemployment rate was 12% in February, compared with just less than 11% in February 2012, and much worse in Greece and Spain where over a quarter of people are unemployed.18 And Eurostat recently confirmed that GDP fell by 0.6% in both the final quarter of 2012 and for the year 2012 as a whole.
The ECB confirmed last week that economic weakness had continued into the first quarter of 2013, justifying the retention of an accommodative monetary stance for “as long as needed”. Moreover the Markit surveys for March were very downbeat for the Eurozone, rounding off another quarter of business decline:
– The manufacturing PMI was 46.8 in March, down from 47.9 in February. Output and new orders were falling at steeper rates than previously, driving further job losses. PMIs were falling in almost all the eurozone countries, with a modest decline in Germany accompanied by steep downturns in France, Spain and Italy.
– The composite PMI (covering both manufacturing and services) was 46.5 in March, down from February’s 47.9. The Services Business Activity Index was 46.4 in March compared with February’s 47.9. The individual country PMIs were: 50.8 for Ireland (implying marginal growth); 50.6 for Germany; 44.9 for Italy; 44.8 for Spain; and 41.9 for France (at a 48‐month low and implying a sharp contraction).
By comparison, the Markit surveys for the UK, though mixed, were more positive on the whole:
– For services, the headline Business Activity Index was a very reasonable 52.4 in March compared with February’s 51.8.
– The construction PMI was 47.2 in March compared with February’s 46.8, which suggested a slower rate of decline.
– The Manufacturing PMI was 48.3 in March compared with February’s 47.9, which also suggested a slower rate of decline.
These survey data suggest that the UK economy may avoid a “triple dip”. The GDP data for 2013Q1 are due for release on 25 April and we will return to this issue in a future Perspective.
The Commission’s latest forecasts suggest that eurozone GDP will contract again this year (by 0.3%) after a 0.6% fall in 2012. Within the eurozone the German economy may grow by 0.5% in 2013, whilst France may register a minimal 0.1% increase. But Greece, Spain, Italy, Portugal and, perhaps surprisingly, the Netherlands are all expected to show a further contraction.
The Cypriot economy is forecast to fall by 3.5%, which now looks extraordinarily optimistic. The Commission does however expect growth to resume in 2014 as the economic bloc “gradually overcomes the headwinds”. In comparison the OBR still expects the British economy, for all its failings, to grow by 0.6% this year and 1.8% in 2014. This forecast seems entirely reasonable as the better labour market data should help to lift consumer demand.