News Column

Fitch: Flat 2Q GDP Reading Emphasises Eurozone Challenges

August 14, 2014

LONDON--(BUSINESS WIRE)-- The failure of the eurozone economy to grow in the second quarter underlines the challenges faced by the bloc as it emerges from the acute phase of its sovereign debt crisis, Fitch Ratings says. Subdued growth is one of several risk factors that lead us to be generally cautious about the medium-term outlook for the eurozone. This is despite some improving credit fundamentals and a stabilisation in sovereign ratings this year.

Weak growth and falling inflation suggest that debt reduction will remain challenging. It will be difficult for eurozone countries to achieve the kind of growth rates and primary balances that in the past have enabled developed countries to achieve very large general government debt reductions. Eurostat confirmed today that eurozone annual inflation had dropped to 0.4% in July, the lowest rate since October 2009.

Flash estimates from Eurostat showed that seasonally adjusted GDP was unchanged in 2Q14 from the previous quarter, and up just 0.7% from a year earlier. Output had expanded for four consecutive quarters prior to 2Q, but growth has been sluggish with the annual growth rate in 1Q14 at just 0.9%.

The slowdown reflected a failure by the eurozone's three largest economies to grow in 2Q. Germany's GDP shrunk by 0.2% qoq, as did Italy's, while France's was static. This more than offset an improving performance in parts of the periphery, where Spain and Portugal both posted increases of 0.6%.

The poor performance of the largest economies may be partly due to temporary factors. The German contraction reflected a faster increase in imports than exports as well as a fall in capital formation that was in part due to the mild winter weather boosting construction in 1Q (when GDP rose 0.8% qoq). However, the ZEW institute said yesterday that the crisis in Ukraine had reduced investment by German companies and that its confidence index had hit an 18-month low, suggesting investment may not bounce back quickly. France meanwhile saw a second consecutive quarterly fall in investment.

Weak investment suggests that the eurozone's recovery will struggle to accelerate, having so far been driven mainly by net exports. A recovery in investment would not only boost GDP but increase growth capacity, making the recovery more sustainable. High public and private sector debt ratios and adverse demographic trends weigh on the longer term growth outlook. Potential growth is likely to be well below the average of 2.1% seen in the first 10 years of the euro's existence.

Nevertheless, the recovery could become more balanced as domestic demand benefits from slowing fiscal consolidation, improved confidence and normalisation of financial conditions. Better credit fundamentals, including the end to the eurozone's recession and improving fiscal positions and macroeconomic performance in the periphery, have been reflected in our rating actions this year. These have seen upgrades to Spain and Greece and positive Outlook revisions for Italy and Portugal, among others. Last month's stabilisation of the Outlook on the Netherlands means there are currently no eurozone sovereign ratings on Negative Outlook, for the first time since the onset of the eurozone crisis.

Disclosure Statement: The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

Applicable Criteria and Related Research:

2014 Mid-Year Sovereign Review and Outlook

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=752067

Global Economic Outlook - Gradual Recovery, But Downside Risks Remain

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=751284

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.



Fitch Ratings

Douglas Renwick, +44 20 3530 1045

Senior Director

Sovereigns

Fitch Ratings Limited

30 North Colonnade

London E14 5GN

or

Mark Brown, +44 20 3530 1588

Senior Director

Fitch Wire

or

Media Relations:

Peter Fitzpatrick, +44 20 3530 1103, London

peter.fitzpatrick@fitchratings.com

Source: Fitch Ratings


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