Business World

Tuesday 23 January 2018

Bumper German growth exposes two-tier Europe

New headache for ECB on rates as spreads on PIGS bonds widen further

A worker assembles a Mercedes Benz E-Class automobile on the production line in Daimler AG's Mercedes factory in Stuttgart
A worker assembles a Mercedes Benz E-Class automobile on the production line in Daimler AG's Mercedes factory in Stuttgart

Brendan Keenan

A 'blockbuster' economic performance from Germany in the second quarter served only to remind nervous markets of the differing economic performances in the 16-nation euro area.

Interest rates on government debt in the "peripheral" euro economies continued to rise. As the National Treasury Management Agency (NTMA) said it would seek to borrow up to €1.5bn at an auction on Tuesday, the difference between Irish rates and German ones widened to a six-week high of 2.93pc.

Yields on German government bonds fell, even though the strong growth figures would normally encourage bets on higher interest rates. Europe's largest economy expanded by 2.2pc -- the fastest since unification in 1989 -- fuelled by rampant exports.

Investors feel the European Central Bank cannot afford to raise interest rates with Greece in recession and other economies showing sickly growth.

"This is going to become a very serious headache for the ECB," Marco Annunziata, chief economist at UniCredit Group in London, said in a Bloomberg Television interview.

"If the ECB were the Bundesbank, it would be raising rates very quickly. But Spain, Greece, Italy -- they can't afford it."


Figures from Eurostat, the EU statistical service, showed most eurozone countries growing by around 0.5pc during the quarter. France's 0.6pc expansion was also better than forecast, while the Netherlands and Austria grew 0.9pc.

Output (GDP) in Spain and Portugal increased by just 0.2pc in the three months to June -- an annualised rate of less than 1pc -- while Greek GDP declined by 1.5pc.

Sentiment also suffered from news that Spanish banks had to borrrow €130bn from the ECB in July, despite the good showing of its major banks in EU stress tests.

Growth figures for Ireland in the second quarter are not yet available. The 2.7pc increase in output (GDP) in the first quarter was the fastest in the eurozone, but national income (GNP) contracted. GNP is seen as a better guide to tax revenues and most analysts hope for a small rise in the second quarter.

The German surge in exports, from a 25pc collapse at the start of the crash, contributed almost two-thirds of the eurozone's expansion of 1pc. This is seen as unlikely to be sustained as the Chinese economy cools and US growth falters.

Sluggish consumer spending may suffer further when Berlin introduces a fiscal squeeze from next year.


"Germany's excellent recovery in the second quarter presents an opportunity for sustained growth in Europe -- which has already been rejected in favour of misplaced fiscal and monetary rigour and bogus demographic reasoning," said Charles Dumas at Lombard Street Research in London

"Europe needed to use the momentum of second quarter income growth to generate a domestic spending follow-through, most notably by consumers. But violent fiscal deflation, initially in Greece has already sent its GDP down. Spain's will follow in the third quarter, and is much more important, while Portugal, and even Italy, are in the same boat."

"It's difficult to see how this level of growth can be maintained. Some level of slowdown seems inevitable," said Simon Barry, chief economist at Ulster Bank in Dublin.

"The traditional split of the German economy between exports and weak private consumption is still in place," said Jorg Kramer, chief economist at Commerzbank in Frankfurt. "People are very cautious."

But Julian Callow, economist at Barclays Capital, thought German growth was bound to help the general eurozone situation.

"The result should assist the process of German deficit reduction and in turn foster a climate where Germany is better able economically and politically to offer support to other euro area economies that might require assistance," he said.

Irish Independent

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