Thursday, July 31, 2014

31/7/2014: Deflationary Trap: Eurocoin Signals Slowing Euro Area Growth in July

July Eurocoin - higher frequency gauge of economic activity in the euro area published by CEPR and Banca d'Italia - is out. Headline number posted a decline from 0.31 in June to 0.27 in July, consistent with slower growth in the first month of Q3 2014.

As chart above shows, July reading is barely above the statistical significance line, suggesting that the slowdown is quite pronounced. As Eurocoin release indicates: "The negative impact of the fall in industrial production in May and of the weak performance of the stock market in July was partially offset by the flattening of the yield curve." In other words, save for the excessive exuberance in the bonds markets, the economy is showing substantial weaknesses going into Q3.

This means that while Q2 2014 projection is now for stronger growth at around 0.31-0.34% q/q, up on officially estimated Q1 2014 growth of 0.2%, Q3 2014 took off with a growth outlook of around 0.26-0.28%.

Current economic activity is sitting at around the rates compatible with November-December 2013. Barring any significant changes in HICP (although indications are, HICP will fall to 0.65% for July data), the ECB remain in the proverbial 'deflationary risks' corner:

To-date, while growth moved into positive territory over the last 12 months, inflationary dynamics have pretty much collapsed.

If July trend (falling activity) remains into August and September, we are looking at further worsening in the overall activity in the euro area and more pressure on inflation to the downside.

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