Euro area periphery countries show faster-than-expected improvements and in line with that sovereign spreads have tightened. The outlook for the periphery has brightened and, for Italy, Spain and Ireland, manufacturing PMIs are above 50 and point to positive GDP growth in Q3. The improvements in soft data have spilled over to some hard data. All of the periphery countries except Greece have had a slightly declining unemployment rate. Other hard data also show signs of stabilisation.
We look for a continued gradual improvement helped by the global recovery. The return of confidence is expected to result in a stabilisation of domestic private sector demand at the end of the year. This is supported by fading headwinds from fiscal tightening and fears of a euro break-up. Nevertheless, the short-term outlook remains challenging and the stabilisation could derail in case of unforeseen shocks.
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