Eurozone set to exit recession as industrial output rises finally

By bne IntelliNews August 14, 2013

bne -

June saw industrial production in the Eurozone rise for the first time in a year. Together with signs of improvement seen in manufacturing and employment data, analysts are confidant in forecasting that the single-currency region will finally climb out of recession in the second quarter.

Data for June released on August 13 showed industrial output in the Eurozone rise by 0.7% on a monthly basis, and in the EU27 by 0.9%, according to estimates released by Eurostat. That followed the latest in a long series of contractions, with May's production decreasing by 0.2% and 0.4% respectively.

The annual industrial production figure saw June 2013 outstrip the previous year by 0.3% in the Eurozone and 0.4% in the EU27. The good news for Emerging Europe is that parts of the region are leading the charge; the bad news is that others are lagging at the back.

Overall, industrial production rose in 11 of the EU states reporting data, and fell in 11. The highest increases were seen in Romania (+9.6%), Poland (+5.3%) and Estonia (+4.7%). With domestic demand in the new member states struggling, their huge dependence on demand for exports out of the EU has only grown. That has seen them dragged into recession as the Eurozone crisis has ground onwards. The Polish economy is forecast to have expanded by just 0.7% in the second quarter.

Forecasts that the Eurozone is set to finally escape six consecutive quarters of economic contraction will be hugely welcome around Central and Eastern then. That's especially true of those that continue to lag. The largest decreases in industrial production in June still saw Bulgaria (-4.4%) and the Czech Republic (-3.0%) struggling, their falling output performing worse than only Finland's (-5.9%).

Despite more promising data in recent weeks, the Czechs are still struggling to escape the country's longest-ever recession. However, the encouraging signs continue to arrive. On August 13, the ZEW Indicator of Economic Sentiment for Germany was reported to have risen to its highest level since March. As much as the Czech economy is dependent on the Eurozone, it's Germany in particular that calls the tune for the country. "The... optimism is supported by the robust domestic demand in Germany," writes the Centre for European Economic Research, or ZEW. With GDP data due to be released on August 14, a Bloomberg survey of economists predicts a 0.5% rise in the second quarter.

Anna Zabrodzka, economist at Moody's Analytics says: "Euro zone industrial production rose in June compared with the previous month. Although monthly changes are volatile, the outlook for the region's industrial output has been generally downbeat, with some signs of stabilisation. In annual terms, production grew for the first time in one year. The closely watched Markit purchasing managers' index for manufacturing surged in July to a two-year high, rising above the expansion/contraction level of 50 for the first time since July 2011. The measure climbed to 50.3 from 48.8 a month earlier, which points to a slow but noticeable improvement in business conditions. The index increased for all major euro zone economies except Spain, where it fell to a two-month low, suggesting that the country's manufacturing sector will continue to shrink in the coming months."

"Falling demand within the euro zone has been the key drag on production, and the dominance of intraregional trade is partly to blame. Elevated unemployment has also been curbing consumer spending. The unemployment rate in the euro zone held at 12.1% in June, though the number of people out of work nudged down by 24,000. Higher taxes, slack wage growth, and tightened credit are eating into household purchasing power and constraining household spending.

"Moody's Analytics expects the real GDP to have remained stable in the second quarter from the previous stanza, after six consecutive quarters of output contractions. The recent signs of stabilization improved the sentiment across the region somewhat. The euro zone business and consumer confidence index rose in July to its highest level in more than one year, although it remained below its long-term average."

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