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The euro area: the snow slightly hinders growth
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The latest figures confirm the economic recovery in the euro area...
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After closing the last quarter of 2010 and with almost all the economic data published, we can conclude that activity is definitely picking up in the euro area, although there's still a tailwind. In other words, various factors have slightly increased uncertainty regarding the growth trends in 2011. Among these are inflationary pressures and the tensions in some segments of the financial markets in the euro area, in particular public debt.
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In point of fact, the flash estimate for gross domestic product (GDP) for the fourth quarter 2010 published by the statistics office, Eurostat, showed an increase of 0.3% quarter-on-quarter with year-on-year growth at 2%. As can be seen in the graph below, the euro area has been advancing at this cruising speed of 2% since the second quarter of the year 2010.
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...in spite of adverse weather in the last quarter of last year.
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Although we still don't have the breakdown of the GDP components, the bad weather suffered by the European continent in the months of November and especially December hit several economic sectors hard. For example, construction came to quite a standstill due to the bad weather in various countries, particularly Germany. We only need to think back to the collapse in transport due to the heavy snowfalls in Germany, France and Holland, among other countries. Apart from the sectors of construction and transport, retail was also hard hit by the bad weather.
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Several countries in the euro area are already creating jobs.
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So what will happen now with consumption after the worst of the harsh winter has been left behind? Fortunately, the high frequency series give us an idea of how this key variable might perform. Of note are the consumer confidence indices, which continue to rise, indicating that consumption should behave relatively positively in the coming quarters, even more so considering that a large number of purchases were perhaps postponed due to the physical impossibility of getting to the shops.
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High business confidence should bolster investment.
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For example, the consumer confidence survey carried out by the European Commission was up in February compared with the previous month, keeping intact the recovery started in March 2009. We must therefore conclude that the negative figures for retail sales in the months of November and December 2010 will not stretch into the first few months of this year. Moreover, the creation of jobs in countries such as Germany, France, Holland and Belgium should strengthen consumers' disposable income, although the unemployment rate is actually remaining stable at 10% for the euro area as a whole. However, we expect the unemployment rate for the whole area to fall over the coming months due to the slowdown in job losses in those member states that are not in such a good situation as the countries already mentioned.
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Rising oil prices raise the price of imports...
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Another important economic component to predict how economic activity will behave over the next few quarters is investment. This is where we might find the most positive surprises in the coming months. There are two reasons for such optimism. Firstly, it's highly revealing to analyze the performance of industrial production (excluding construction) for the euro area as a whole, and this grew by 8.0% year-on-year in December. Secondly, business confidence indices remain at record high levels, a reflection of improved entrepreneur sentiment. This has been helped by orders from foreign orders and even to serve domestic demand.
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However, there are two components that have reduced their contribution to economic growth: public expenditure and net exports. Regarding the former, although public spending grew by 2.6% year-on-year in 2009, in the third quarter of 2010 it did so at an imperceptible rate of 0.4%. The impact of budgetary restrictions can still be felt on public works, which at the end of 2010 were already falling at a rate of 14.4% year-on-year. Announcements regarding fiscal changes in member states of the euro area suggest that this component might even reduce economic growth in the first two quarters of this year.
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...and push up inflation in the euro area.
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Regarding the figures for international trade, these point towards the risk of a negative contribution by the foreign sector to economic activity. In the months of November and December 2010, imports exceeded exports, totalling 1,549 and 533 million euros respectively. One of the main reasons for this situation is the rising price of oil and its effect on crude imports. Taking into account the recent upward trend in oil prices due to geostrategic problems in North Africa, we cannot rule out the possibility of the trade balance slightly reducing growth in GDP in the first six months of this year.
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Considering all these factors, we expect economic growth for the euro area as a whole throughout 2011 will fall slightly towards rates of 1.5% year-on-year by the end of this year, so that the year overall might post an average growth in GDP close to 1.6%.
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The European Union summit in March will be important for resolving the sovereign debt crisis.
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On the other hand, two big risks need to be highlighted: the tensions in prices and sovereign risk. Regarding the first risk, early figures for January put harmonized inflation at 2.4% year-on-year. The consensus of economists expect inflation to continue rising a few tenths of a percentage point over the next few months due to the sharp rises in food and energy commodities. Several members of the European Central Bank (ECB), among them Juergen Stark and Athanasios Orphanides, have even stated in various forums that they expect inflation in 2011 to remain above 2% year-on-year for a longer period before it moderates. For the moment, in our main scenario we have ruled out any second-round effects (such as wage rises) that might compromise the ECB's aim of price stability.
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Regarding the second risk mentioned (sovereign debt), the various decisions taken at the European Union summit held on 24 and 25 March will be very important, concerning different aspects of coordinating economic policies and the changes in the instruments created to tackle the crisis caused by the fiscal situation of several member states of the European Union.
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In summary, the euro area's economic situation has a symmetrical risk. On the one hand, redirecting the aforementioned two risk factors might speed up growth, while, if they intensify, they could slightly slow down economic activity. It's no surprise that several supranational bodies, including the International Monetary Fund, have stated that the data confirm the euro area's economic recovery but that some turbulence remains that might disturb the plane's passengers.
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