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Market Comment
Euro area GDP releases to reinforce negative outlook
15 May 2012
Conall Mac Coille
Yesterday, Spanish and Italian bond yields rose to their highest level this year, at 6.2% and 5.7% respectively. Stock indices meanwhile suffered their worst one day fall in three weeks, with the Euro Stoxx 50 Pr down -2.3%, the Dax -1.9%, the CAC 40 -2.3% and the S&P 500 declining by 1.1%. Following assertions over the weekend by ECB officials that a Greek euro exit could be managed technically, markets questioned whether the size of the European Stability Mechanism (ESM) at €500bn could cope in the event.
Euro area GDP data are released this morning, with the aggregate number due at 10.00. GDP is expected to have declined by 0.2% in Q1, following the 0.3% fall in Q4, and confirming that the euro area has fallen into a double-dip recession. Data released this morning show that French GDP was flat in Q1 with zero growth, while the German economy expanded by 0.5% in Q1, well above expectations of a 0.1% fall.
However, the market will focus on the Italian GDP release at 09.00 where GDP is expected to have declined by a sharp 0.7%. And we already know that Spanish GDP contracted by 0.3% in Q1. So, on balance, euro area GDP is likely to be in negative territory in Q1, despite stronger-than-expected growth in Germany and because of contracting economic activity in the southern European economies.
With purchasing manager indices deteriorating in April, the indicators on activity in the real economy paint a bleak picture — clearly a poor backdrop with market sentiment shattered by concerns on developments in Greece. Yesterday, Greek political parties again failed to come up with any workable proposals for a new government. Indeed, Syriza party leader, Alexis Tsipras, boycotted yesterday's discussions on the basis that they countenanced some negotiation with the EU/IMF on the bailout package. Proposals from Greek president, Karolos Papoulias, for a technocratic government have now also been rejected. So, new elections in June still seem the most likely outcome.