Euro area data releases keep beating expectations. This time around, the surprise has come from Italian manufacturing, with a surge of the Istat sentiment index and of the PMI to levels consistent with a solid expansion of activity in Italy. French manufacturing is the only sector still failing to latch on to the recovery, although the trend is improving……….
Intesa Sanpaolo – Research Department – For professional investors and advisers only
Although an agreement has still not been reached between Greece and its creditors, the greater verbal discipline shown by the parties may be a signal that a last-minute deal could be at hand.
This has been another week of more than encouraging data from the euro area, and this time around the surprise has come from Italy. At the beginning of the week, the Istat index of business sentiment among manufacturing companies improved sharply, to 103.7 from a previous reading of 100.5, touching its highest level in over four years, at a level above the long-term average. The indications provided by the Italian manufacturing PMI were even more encouraging, as the index hit its highest level since the end of 2013 (53.3 from 51.9), and is now second only to the Spanish index (54.3, broadly unchanged compared to February). In addition to a stronger than expected PMI in Italy, the index was also revised upwards in Germany by four tenths to 52.8, and in France to 48.8, where nonetheless the index is still signalling that industry is contracting. The euro area manufacturing PMI, as a result, has been revised upwards to 52.2 from 51.9, levelling off over one point higher than last month. The EU Commission’s sentiment index also came in higher than forecast, at 103.9 from 102.3, thanks to a 1.7 recovery in sentiment in the manufacturing sector, as well as a further improvement of confidence in services, retail sales, and the construction sector.
Therefore, we believe our forecast for an acceleration of GDP growth in the euro area 0.4/0.5% q/q over the spring months seems to be more than supported by confidence surveys. The positive surprise introduced by Italian data proves that the recovery is spreading, and is no longer limited solely to Germany and Spain. Among the major countries of the euro area, only France is still lagging behind, although the overall picture is improving. Next week, February industrial output data will photograph the trend of industry in the first quarter of the year, which typically sets the tone for average growth in the year. Euro area inflation data showed a recovery of the yoy change, to -0.1% in March from -0.3% yoy, as opposed to a decline of the core trend to 0.6% from a previous rate of 0.7%. In our view, if the recovery picks up speed, as we expect it to, downside risks to the core trend will ease back progressively. In our view, given a still negative output gap until mid-2017, core inflation is unlikely to hit 1.3% already in 2016, as estimated by the ECB.
Another week is ending and there is still no firm indication of a solution being found to the Greek crisis, although a last-minute deal remains the likeliest outcome. The much-awaited list of measures that was due to be submitted on Monday proved to be only an intermediate step, and no further Eurogroup meeting has yet been called. A technical committee, the Euro Working Group, met on Wednesday to examine the progress made.
Pessimists point out that the longer the delay, the more hard-pressed the Greek government will be to honour its payment commitments. On 9 April, the payment of a 360.5 million SDR tranche is due to the IMF, which translates into around 468 million euros. A few days later, on 14 April, 1.4 billion in six-month GRBL will be due, followed by one billion in three-month GRBL on 17 April. In theory, the bonds reaching maturity could be renewed, and the next auction is scheduled on 8 April. However, a significant share of the bonds seems to be held by foreign investors, who will almost certainly seek to unwind their exposure unless an agreement is reached by then with the IMF and the Eurogroup. On the other hand, Greek banks are not authorised to expand their portfolios, and the central bank will probably have no further leeway to absorb a significant share of the issue; therefore, GRBL maturities could also end up weighing on the state’s liquidity reserves.
The optimists, by contrast, may rely on a few signals that seem to indicate that some progress is being made: within the framework of a very rigorous verbal discipline, as opposed to the cacophony of tones recorded over the previous weeks, in itself a positive signal, the President of theEuropean Council, Tusk, said he is certain that an agreement will be reached “by the end of the month”, whereas the Greek minister of the economy expects a deal to be struck next week. The German chancellor, on her part, has said that some flexibility in terms of the reform programme may be allowed.
Appendix
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