Economics Weekly - Don’t you let that deal go down

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Economics Weekly - Don’t you let that deal go down

There are welcome signs that Europe’s economy is slowly emerging from its prolonged slump. It’s a pity then that agreement with Greece remains unfinished business. Securing that deal would remove the Damoclean sword that hangs over the currency zone’s prospects.

Economic Analysis

08 June 2015

Europe's economy is slowly emerging from its prolonged slump.


May seems to have brought the Eurozone’s experiment with deflation to an end. Prices were 0.3% higher than a year ago and core prices, which exclude food and energy, were up 0.9%. Inflation’s return will cheer the European Central Bank (ECB) which is busy buying bonds (quantitative easing) in an attempt to boost the economy. But celebrations will be muted as there are plenty of countries where prices are still falling.

Slowly, slowly 

Eurozone unemployment ticked down a notch to 11.1% in April, leaving it 0.6% lower than a year ago. It’s been slow going. Unemployment in Italy is basically unchanged over the last year, whilst France is heading in the wrong direction. Even Spain, the fastest growing major economy, still has a jobless rate of over 20%. On a brighter note one of the better performers was Ireland. Its recovery has helped unemployment fall by 2%, but the 46,000 newly-employed Irish workers are very much in the minority compared with the Eurozone’s 17.8 million job-seekers.

Slightly less crazy 

The ECB promised to buy Eurozone government debt at a rate of €60bn a month until September 2016, unless there was a big change in the economic outlook. But far from pushing interest rates on government bonds down, yields have risen in recent weeks. The interest rate on 10-year German debt got as low as 0.07% in April, but is now up in slightly more normal territory of 0.8%. That’s still very low, but it is back above Japan’s yields and shows the markets have some confidence that the European economy will eventually escape its current predicament.

Europe vs US 

European firms reported decent, if slightly slower growth in May. The Eurozone Purchasing Managers’ Index (PMI) slid from 53.9 in April to 53.6 as growth eased in Germany, Spain and Italy. France bucked the trend, but at just 52 it still dragged down the average. Two months into Q2 this suggests the Eurozone should have another respectable quarter in terms of GDP growth.

Pass or fail?

It's exam time. If students were asked, "how is the US economy faring?" more than a few would struggle to answer. GDP shrank in Q1 and the supply managers say service sector growth slowed in May. Yet the jobs machine was running at full tilt last month, employment rising by 280,000. Wage growth continues to pick up. Ambiguous data mean the Fed will wait a while before hiking but, on balance, the US economy looks in good shape.

Submerging markets 

Last week's PMIs continue to point to struggles across the emerging economies. A composite PMI of the main emerging markets fell from 51.3 to 50.7, the third consecutive fall and lowest reading in a year. China continues to languish. But the sharpest deterioration in recent months has come from Brazil, with output across manufacturing and services contracting and jobs being cut. And because of high inflation the central bank has been raising rates, even as the economy struggles. Emerging economies are having a tough time of it.

May's modesty vase 

Managers in the UK’s manufacturing and construction sectors reported a modest rebound in activity in May, with the PMI edging up to 52 and 55.9 respectively. Relatively robust orders from home-grown customers are compensating for weak international demand, a further sign that the global economy is out-of-sorts. And it would be foolish to see a turnaround in construction as the first stirring of the sector's Rocky-like comeback, rising up and back on its feet. It may do, but it's been down and it's too early to call. In a mirror image, service sector managers reported a modest slowdown in activity in May. The sector's doing alright. No more, no less.


Mortgage approvals rose by 10%m/m to 68,000. No doubt the new stamp duty regimes were partly responsible, so we will have to await the next couple of months' numbers to get a proper picture of the underlying strength of the market. House price growth has slowed according to Nationwide and Halifax but all indications are that it will pick up again soon. Meanwhile, interest rates on fixed rate mortgages fell again: an average two year fixed rate mortgage for someone with a 25% deposit now down to 1.95%.


This material is published by The Royal Bank of Scotland plc (“RBS”), for information purposes only and should not be regarded as providing any specific advice. Recipients should make their own independent evaluation of this information and no action should be taken, solely relying on it. This material should not be reproduced or disclosed without our consent. It is not intended for distribution in any jurisdiction in which this would be prohibited. Whilst this information is believed to be reliable, it has not been independently verified by RBS and RBS makes no representation or warranty (express or implied) of any kind, as regards the accuracy or completeness of this information, nor does it accept any responsibility or liability for any loss or damage arising in any way from any use made of or reliance placed on, this information. Unless otherwise stated, any views, forecasts, or estimates are solely those of the RBS Economics Department, as of this date and are subject to change without notice.

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