Draghi savors synchronized summer for top euro economies

Mario Draghi could be forgiven for lingering a little longer on the sun lounger this August.

For the first summer since he took office as president of the European Central Bank, the region’s four biggest economies are posting growth, spurred by a weaker euro and lower oil prices that are boosting consumer spending. Fears about deflation have abated, and another year of ECB extraordinary stimulus means economic tailwinds are likely to persist.

Reports on Friday will probably show output in the 19- nation bloc expanded for a ninth quarter, with Germany, France, Italy and Spain all growing. This relatively smooth sailing stands in contrast to the summer of 2012, when Draghi said he’d do “whatever it takes” to keep the union together. A year later, his home country Italy lumbered on in its longest recession since World War II, while August 2014 marked Draghi’s shift toward quantitative easing in Jackson Hole.

“It fits in to the general picture of a gradual recovery taking shape,” said Anatoli Annenkov, a senior economist at Societe Generale in London. “Certainly for the ECB this is probably one of the first summers where they are not so actively engaged.”

Euro-area gross domestic product expanded 0.4 percent in the three months through June from the previous quarter, according to the median forecast of economists in a Bloomberg survey. That would match the pace of the first quarter.

Spanish Boom

Spain, whose government had to seek aid for the banking sector in 2012, is now at the forefront of the euro area’s economy. It grew the most in eight years in the second quarter and is forecast to expand twice the pace of the bloc this year.

Germany, Europe’s largest economy, is seeing consumer spending benefit from the lowest unemployment rates since the country’s reunification. The Bundesbank predicts “quite robust” growth this year and economists say it expanded 0.5 percent in second quarter.

In Italy, where Prime Minister Matteo Renzi has promised tax cuts to support growth and make up for ground lost, the economy probably expanded 0.3 percent in the period. France may have grown for the fourth consecutive quarter.

“It all points to us having relatively robust growth in the second quarter despite all the troubles in Greece,” said Jens Kramer, economist at Nord LB in Hanover, Germany. “Compared with the past, the heterogeneity among the economies may have diminished somewhat — but it remains.”

QE Working

Judging by a closely watched manufacturing and services index, the euro area maintained momentum at the start of the third quarter, weathering strains on confidence from the Greek debt crisis. While the inflation rate held steady in July, core inflation, which strips away volatile elements such as energy and food, accelerated to 1 percent — the fastest in 15 months. A second reading of inflation data is due on Friday.

For ECB Governing Council member Bostjan Jazbec, these data confirm the central bank’s QE policy.

“I don’t think that we need any tools and any additional instruments at this point,” Jazbec said in an Aug. 5 interview in Ljubljana. The stimulus is “obviously working,” he said.

The ECB has committed to running its bond-buying program until at least September 2016 and minutes of its July 16 policy meeting — due to be published in Frankfurt on Thursday — will provide additional insight into the central bank’s thinking.

Grexit Averted

Still, Draghi can’t relax completely. Just a month ago, the bloc faced the possibility of a breakup and ensuing financial market turmoil as Greece threatened to default on its debts. While the immediate crisis in Athens has dissipated, bank stocks collapsed almost 60 percent last week and some officials fret the country is still one accident away from leaving the euro.

German industrial production unexpectedly fell in June, resulting in stagnation for the second quarter. In France and Italy, the gauge also declined in June.

Then there’s oil: its 25 percent slump since the end of June could revive deflationary concerns. And joblessness, particularly in southern Europe, is still high, potentially constraining growth.

“A Grexit scenario could massively hit sentiment, and thus weigh on the euro-area economy,” said Johannes Gareis, an economist at Natixis in Frankfurt. “Another question is China. It’s a risk factor for Germany and its exports.”

Economic growth is cooling in the world’s second-largest economy and the stock market suffered a massive rout. That could weigh on third-quarter momentum in the euro area, according to economists.

Citing a slowdown in emerging and developing economies, the International Monetary Fund last month cut its global growth forecast for 2015. Yet it expects a pickup among advanced economies, with the euro area’s recovery “broadly on track.”

Still, the currency region is set for a busy period over the rest of the year, which may feature elections in Greece in addition to scheduled ones in Spain. Annenkov recommends Draghi make the most of any vacation he may take.

“It’s not going to be a long holiday for him,” he said.

[Bloomberg]