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Eurozone Emerges from Recession Thanks to France and Germany

The German and French economies grew respectively by 0.7% and 0.5% in Q2 (faster than the US), pulling the Eurozone out of its longest recession.


Eurozone growth was 0.3% from the previous quarter, with its two biggest economies revealing unexpected strength such as Austria (0.2%) and Finland (0.7%). In the meantime, Portugal was the best performer with 1.1% growth due to higher exports. That compared with around 0.4% growth in the quarter (1.7% annualized)  in the United States.


Regarding France, economy posted its strongest quarterly growth since early 2011 supported by consumer spending, industrial output and inventories, although investment component fell gain. At the opposite, German economy posted  its largest expansion in more than a year thanks largely to domestic private and public consumption ahead of elections (September 22).


On the negative side, the recession is worsening in Netherlands (-0.2% QoQ ; -1.8% YoY) and particularly in Cyprus (-1.4% QoQ ; -5.2% YoY) where the contraction could exceed forecast set by European Commission (-6.7% for 2013) and therefore could challenge the bailout program.


Overall, despite some disappointments, Eurozone is on track to technically recover (two positive quarters) in Q3 2013  as several surveys  (Eurozone PMI, Sentix Investor Confidence) show that conditions have improved since the end of June.


Source: Eurostat

Chinese Stats Suggest that Activity Is Accelerating

After a very weak H1 2013, several data confirmed that Chinese activity is recovering and this trend could be sustained in the coming months thanks to a global recovery, an increase of government spending and an accommodative monetary policy.


1/ The price of basic materials shows that demand has become stronger since the end of June which suggests an improvement of industrial production:
- Imported Iron Ore Prices rose 14% since the end of June while Domestic steel prices increased by 9.5%.
- Copper prices is still up 3.2% on the same period.


Source: Bloomberg


2/ This move was confirmed this morning by the rebound of imports in July:
- Imports Y/Y: +10.9% v -0.1%e (-0.7% prior).
- Jul Iron Ore imports record 73.1M tons, +26.4% y/y, record high > June Iron Ore imports 62.3M tons, +6.8% y/y.
- Jul Copper, Product imports 410.7k tons v 380.0K tons m/m, +12% y/y > June Copper, Product imports 379.9k tons, +9.7% y/y.


3/ Exports also rose in July thanks to the recovery in EU and acceleration in US:
- Exports Y/Y: +5.1% v +0.5%e (-3.1% prior).
- Exports to US: 5.2% y/y in July > -5.4% y/y in June.
- Exports to EU: 2.8% y/y in July > -8.3% y/y in June.


4/ The main indicators (Baltic Dry Index, Global PMI) suggest that global growth is also accelerating:
- On a Y/Y basis (MM-20 days), Baltic Dry index turned positive in July and rose 18% yesterday.
- JPMorgan’s Global Manufacturing PMI edged up to 50.8 in July from 50.6 in June.


5/ Government spending will accelerate in H2. As an example, State-owned railway giant China Railway Corporation (CRC) has announced a plan to raise fixed-asset investment to 660 billion yuan (106.5 billion U.S. dollars) this year to boost railway development.


6/ Since the end of June, PBOC has adopted a more accommodative policy and could cut RRR in the coming months:
- Today: PBoC to issue CNY15B in 14-day reserve repos in today’s session; For the week, injecting CNY20B v CNY136B in prior week.
- On August 2: China PBoC Q2 Monetary Report: Reiterates to continue to implement monetary policy and fine-tune action when necessary via numerous tools (including RRR).


Eurozone Recovery Could Take Place in Q3 2013

According to the PMIs’ surveys published this morning, Eurozone business activity resumed modest growth in July for the first time since the start of 2012.


More from Reuters:


Euro zone private industry unexpectedly bounced back to growth this month as factories increased output for the first time in well over a year, business surveys suggested on Wednesday.
Markit’s flash Eurozone Composite PMI, based on surveys of thousands of companies across the region and a reliable indicator of growth, jumped to an 18-month high of 50.4 in July from 48.7 in June.
That smashed even the most optimistic forecast in a Reuters poll and is the first month the PMI has been above the 50 mark that divides growth and contraction since January 2012.
“It’s a very encouraging picture, it’s pretty broad-based. Germany is leading the pack followed by France but even the periphery … is seeing a return to growth in manufacturing,” said Chris Williamson, chief economist at data collator Markit.
Williamson said the latest PMI results tentatively pointed to 0.1 percent gross domestic product growth in the 17-nation bloc in the current quarter, in line with a Reuters poll taken earlier this month.


These figures were unveiled while the main central banks of the euro area (Bundesbank, Bank of France and Bank of Spain) upgraded their forecasts concerning Q2 2013. Indeed, on July 22, Bundesbank reported that German economy grew at a stronger pace in Q2 (after 0.1% in Q1) with more moderate growth seen in Q3:


The assessment that the German economy expanded strongly in the second quarter after a weather-related weak start to 2013 is being confirmed by current indicators. Important contributions to growth in the second quarter should come from industry and construction.

On July 23, Bank of Spain estimated that the Spanish economy likely contracted 0.1% in the second quarter from the first.


Spain’s central bank said Tuesday the euro zone’s fourth-largest economy likely contracted 0.1% in the second quarter from the first, the latest sign that Spain may be close to emerging from a recession started in late 2011.

In the first official estimate of quarterly economic performance, the Bank of Spain said gross domestic product likely contracted 1.8% from the second quarter of 2012. In the first quarter this year, the economy had contracted 0.5% on the quarter and 2% on the year.


Finally, on July 8, Bank of France upgraded its forecast for Q2 GDP to 0.2%:


France’s economy is expected to have grown 0.2% in the second quarter, the Bank of France said Monday, as it revised upward its prediction from last month.
In its previous estimate, the French central bank expected French gross domestic product to grow 0.1% from the previous quarter.


As a consequence, by taking into account the weight of each economy in the euro area (Germany: 27%; France: 21% and Spain: 12%), we could simulate Eurozone GDP with more precision:


Growth Forecasts
Scenario Pessimistic Central Optimistic
Germany 0.3% 0.4% 0.5%
France 0.1% 0.2% 0.3%
Spain -0.2% -0.1% 0.0%
Others -0.2% -0.1% 0.0%




Growth Contributions
Scenario Pessimistic Central Optimistic
Germany 0.081% 0.108% 0.135%
France 0.021% 0.042% 0.063%
Spain -0.024% -0.012% 0.000%
Others -0.080% -0.040% 0.000%
Total -0.002% 0.098% 0.198%
Total (rounded) 0.0% 0.1% 0.2%

In the central scenario, based on the main central banks’ expectations and on the assumption of a less deeper recession in other countries, Eurozone growth could now reach 0.1% in Q2 2013. Therefore, if the momentum stays positive in August and September, Eurozone could technically exit recession in Q3 2013 (two positive quarters), which will be faster than expected.

ECB Joins Eurogroup and European Council to Secure Eurozone Recovery

Last Friday, European leaders agreed on new steps to fight youth unemployment and promote lending to SMEs. More precisely, officials agreed to deploy €8 billion (up from €6 billion) to create jobs for young people and approved plans for the European Investment Bank to lend €150 billion to small and medium-sized enterprises (SMEs) particularly in southern EU states over 2013-2015.


These decisions came as several indicators suggest that Eurozone growth could stabilize in Q2. Indeed, last Friday, consumption figures for the month of May were above expectations in Germany which represents 27% of the Eurozone economy. In the meantime, Bundesbank said in its June monthly report:


“After a weak start to the year, real gross domestic product should grow strongly in the second quarter of 2013″ 


Positive signals were also recorded in France (20% of Eurozone economy). The main driver of GDP, domestic consumption (56.3% of GDP), increased in May.


Finally, peripheral economies such as Spain or Portugal and also leaders like Germany benefited from a rebound of exports mainly because of a drop in euro in Q2. In these conditions, in order to push euro and rates lower, ECB decided to give a forward guidance, more precisely, ECB said it would keep its benchmark interest rate the same or lower “for an extended period of time”.


More from FT:


The euro hit its weakest level since May after the European Central Bank said it expected interest rates to remain at or below their current levels for an extended period of time.
Mr Draghi said the decision to give forward guidance on interest rates, which was taken unanimously by the ECB governing council, was “a very significant step forward” for the central bank.