The sentix economic index maintained its positive gradient, rising for the fifth consecutive time and recording a number of 28.3. The situation index stood at 37.3 and is the highest level since December 2007. Surprisingly, there is an expectation are for a stagnation of the index, even a decline, as Germany has not fared well lately. There was a slight propensity of fear, as investors pondered over a change of interest rate policy, in the backdrop of improved economic momentum as indicated by Markit Index readings, which pointed to a highly improved performance. For example, the Eurozone composite output index stood at 56.3 and the Services Business activity index at 55.4. This marks as the best quarter performance over the last 6 years. While output was by no means robust, but business activity remained buoyed as there was a healthy inflow of new work, and job creation was stalwart at the behest of elevated business confidence. The expansion of economic activity was witnessed in both the manufacturing and services sector, whereby they grew at the fastest rate since 2011. Further, as per Eurostat, the retail trade volume was higher in May 2017 over a month earlier, with the seasonally adjusted rising by 0.4%. In addition, the seasonally adjusted industrial production rose by 1.3% due to the increase in production of capital goods by 2.3%, consumer durable goods by 1.8% chiefly and non-durable goods by 1.2%.
While Eurozone overall appears to be on a positive recovery tract, the extent of recovery varies by country as evidenced by the spread of the unemployment rates, with Germany standing at 3.9% and Spain and Greece at the other end of the spectrum at 17.8% and 23.2% respectively. This makes the economic gap between the North and South evident. It needs to be pointed out that when the debt crisis grew in 2010, this disparity was a point of political contention that placed the concept of “Eurozone” into question. Grexit was really the epicenter of the political debate when it was poised to cause political and economic upheaval not only in the Eurozone but also the global financial markets. However, hope has emerged from those quarters, as EU commission has lately reiterated that Greece’s fiscal standing has improved, allowing for the country to return to the international bond market, which via financial discipline, should catalyze the economic recovery. Falling yields have been a key indicator in this regard; for example, the 3-month treasury was lower at 2.33% mid-July, down from 2.7% a month earlier. Greece may remain in the limelight of the economic recovery process, with a budget deficit of only 1.2% during 2017, much lower than the stipulated upper limit of 3% set by the EU fiscal rules. Keeping in mind the improved economic performance, Eurozone creditors unblocked new loans worth 8.5 billion early July as part of the 86 billion-bailout plan. These financial measures will alleviate any untoward pressures to economic recovery, as it is expected that the Greek economy is expected to grow 2.1% during 2017, which is above Eurozone average.
Political headwinds, poised by the German elections in September and Italy’s next spring, can give air to turmoil in the region, but it appears that pro-Eurozone message will reverberate in the backdrop of a broader improving economy.