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
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.
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
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
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.
2014 Mid-Year Sovereign Review and Outlook
Global Economic Outlook - Gradual Recovery, But Downside Risks Remain
Source: Fitch Ratings
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