Wednesday, May 16, 2012

Europe GDP...and politics

Political uncertainty in Greece seems likely to keep markets unsettled for a while longer.   Efforts to form a Government following the inconclusive elections of May 6 have failed.  The country now appears headed for a second election on June 10th or 17th. 

The leaders of the main parties were unable to move beyond political rhetoric in each of the various attempts of the last few days to pull a government together.  With a second election increasingly likely as time progressed, the aim was to maintain their line to maximise their share of the vote at the second poll.  The unanswerable question is whether a second election will yield any significantly different result.  One interesting observation is that only 65% of the eligible population voted in the first election.  One wonders what impact a greater voter-turnout in the second poll might have. Only time will tell. 

As I said last week, the odds of a Greek Euro exit (I promise to never use the latest buzz-word “Grexit”) have risen, but it is not a done deal.  There will be ample opportunity for a good dose of political pragmatism to play out before we get to that point, and from a variety of sources.  One interesting comment yesterday was Luxembourg Prime Minister Jean-Claude Juncker (Chair of meetings of Euro finance ministers) hinting that while any new government would have to stand by the austerity program, the EU would not close itself off to debate about extending deadlines.  However, others were not sounding quite so pragmatic.

In the meantime the sun still comes up each morning and the data continues to flow.  Euro area GDP came in at a better than expected “no change” in the March quarter.  Average market expectation were for a contraction of -0.2% for the quarter following the -0.3% in the fourth quarter of 2011.

That flat overall result belies sharply divergent performance across the Euro area with Spain contracting -0.3% in the quarter, Italy -0.8% and Portugal -0.1%. At the other end of the spectrum Germany grew 0.5% over the quarter.  France recorded “no change” over the quarter. 

Greece does not produce quarterly seasonally adjusted data, but recorded -6.2% for the year.  Euro area annual growth now stands at 0% for the year to March, with Spain -0.4%, Italy -1.3%, Portugal -2.2%, France at +0.3% and Germany +1.2%.

The surprise in the data was the strength of the German economy over the quarter.  Exports were stronger than expected (most likely to destinations outside Europe) while domestic demand continues to hold up well, reflecting the relatively low unemployment rate.  Strong private consumption in Germany is a bright spot for the rest of Europe for whom Germany is a major export market.

We had expected small contractions in GDP for the Euro area for both the March and June quarters of this year.  This latest better-than-expected result does not alter the view that conditions will remain tough across Europe in the foreseeable future, especially in countries where austerity is hitting hard.  Forward looking indicators such as the PMI support that view. Furthermore, the latest political uncertainty can only detract from business and consumer confidence.