There are several interesting releases in the Euro area next week. Most important are the preliminary PMIs on Monday. The euro area PMIs have been more or less flat over the last three months. Danske expect a small improvement in the PMIs as indicated by last week’s increase in ZEW survey data and their PMI models. Another interesting release due on Monday is the government debt to GDP ratio.
The Dutch prime minister will on Monday launch a bid to salvage his austerity budget amid political chaos that could cost the country its AAA credit rating and plunge Europe’s debt rescue plans into disarray. Mark Rutte, who is a key ally of Germany and the Eurozone’s “hardliners” on financial discipline, has called an emergency cabinet meeting after budget talks collapsed at the weekend. He is expected to resign today and announce snap elections, pushing yet another “core” Eurozone country into political and economic uncertainty. In France, early polls pointed to a victory of Francois Hollande in the first round of the presidential elections setting the stage for a run-off between the socialist challenger and incumbent Nicolas Sarkozy on May 6th. Mr Hollande has pledged to renegotiate the European fiscal pact that binds countries to a 3pc deficit limit by next year, The Telegraph reports.
Deliberations at the G20 and IMF meetings over the weekend also had the euro area at their core as the importance of building up financial firepower was underlined once again. While this debate is likely to be ongoing there is no doubt for us that restoring economic growth must be the centrepiece of any sustainable resolution to the euro area debt crisis. With a general consensus that the euro area contracted in the first quarter of this year, signalling a return to recession, Monday’s ‘flash’ April PMIs will be looked at for clues about Q2 prospects. After an unexpectedly sharp decline last month, Lloyds TSB look for the euro area manufacturing PMI to retrace some of its losses but remain well in contractionary territory at 48.4. The services PMI is expected to post its second successive gain to 49.4, from 49.2 in March. The data are key and will set the tone for sentiment in the coming month, just as last month’s disappointment soured the outlook. Another key concern is the growing divergence in performance between the ‘core’ and ‘periphery’ countries, particularly following last week’s figures showing that Germany is faring relatively well. Lloyds TSB think this divergence is set to continue, potentially forcing the ECB to make some tough choices as it tries to gauge the appropriate policy setting across the region as a whole.
The news flow out of the euro area is likely to be more mixed in the coming quarters. While Danske still believe the euro area is leaving recession in Q2 12 to revert to low growth rates in the remainder of 2012, the picture will likely be dominated yet again by the euro debt crisis. Focus is on Spain as a mix of sharply declining house prices, missed deficit targets and a very high and rising unemployment rate is making global investors turn their back on Spanish bonds. Danske believe it is mostly a sentiment crisis though, as Spain even in a very negative scenario with prolonged recession, high losses in the banking sector and continued missed deficit targets will not reach a debt level higher than 110% in coming years from the current level around 70%. While this is not great it is a far cry from being a situation comparable to Greece and Spain is still far from insolvency. Nevertheless, a confidence crisis can in itself become self-fulfilling and Danske do see a 30% chance that Spain will end up in the arms of the EU and the IMF to get a rescue package as we have seen in Portugal, Ireland and Greece. While this is no disaster, it would likely cause a lot of uncertainty and tension in the financial markets. A further escalation of the euro crisis is also the main downside risk to the global economy. However, it should be kept in mind that it is mostly the euro area that is being affected by this, whereas US and China have previously proven fairly resilient to the euro crisis. When the euro crisis flared up in 2010 for example, the US economy and China kept growing at a decent pace.
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