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The European Commission published its latest economic projections for the EU. The Eurozone economy is projected to contract 0.4% in 2012 and remain roughly steady during 2013, driven only by a small increase in net exports with employment deteriorating further and pushing the Euro unemployment rate close to 12%.

One interesting table is the one outlining the difference between GDP and GNI (Gross National Income) in periphery countries due to net outflows of primary income, which makes the fall in domestic income (and demand) much deeper than the corresponding fall in output. This situation is highly relevant in the case of Ireland where a large part of net exports income is transfered abroad to multinational company headquarters:

As a result, in terms of GNI Ireland will have lost a total of 15% by 2014 (a depression), Spain 8% while Greece and Portugal will have the equivelant of another deep recession year added to their list of ‘lost years’.

The employment outlook remains bleak, especially due to the fact that unemployment duration has elevated substantially since the start of the crisis, with long-term unemployed now accounting for more than 50% in the case of certain periphery countries:

The direct result is that screening procedures, skills loss and matching difficulties push the Euro Beveridge curve outwards which will lower future potential growth rates:

Moving to Greece, the EC expects a recession a bit lower than the current Greek government budget projections:

Since a recent Eurobank paper calculated Greek fiscal multiplier for the current macro environment, the 2013 austerity measures can be used to gauge on the expected impact on next year’s output (I will assume a moderate revenue multiplier of -0.3 and use the budget 2013 GDP deflator of -1.2%). Multipliers are real GDP multipliers.  I will also project an optimistic total real export growth of €2bn.

Given that the first budget draft was assuming a no policy change real GDP loss of 1.2%, the projected total loss of output will be around 6.7-10.5% of GDP and the 2013 nominal GDP €173 – 181bn.

BdE published its monthly bulletin for July. Although all of the tables are quite interesting, i will focus on the GDP and money market statistics.

The economic deterioration is quite clear. Fixed investment shows an accelerating decline while final consumption has now turned negative, although not at levels seen in 2009. Government consumption is declining strongly, making a significant negative contribution to growth, something which is certain to become stronger after the July austerity measures and the bailouts of regional governments (which require further cuts in regional budgets). Exports have been the main source of demand for the Spanish economy but even they show a clear pattern of decline (with growth in the Euro area turning negative), lowering the prospects for the general economy.

More detailed data show that the decline in investment is not confined to construction anymore but includes other sectors as well. The decline in exports growth can mainly be accounted by goods, although services are also showing signs of trouble.

BdE projections for Q2 are negative:

«On preliminary estimates, based on still-incomplete information, economic activity in Spain fell again in Q2. The pace of decline was estimated to be sharper than that of the two previous quarters, with a quarter-on-quarter rate of change of -0.4%. National demand fell off more markedly than in the previous quarter (-1.2% against -0.5%), since household spending and general government demand shrank at a quicker pace. As has been the case in recent years, net external demand softened the adverse impact of the decline in national demand on GDP, as it made a positive contribution of 0.8 pp, up on that of the previous quarter, thanks to a moderate pick-up in exports. In year-on-year terms GDP declined by 1%, set against -0.4% in Q1.»


The money market data show that conditions in Spain have worsened in May and June. Unsecured financing seems to only be available for terms up to one month while secured financing up to 3 months. Unsecured loans interest rates increased from 0.48% to 0.83% while repo rates from 0.20% to 0.32% for 1 month, 0.21% to 0.77% for 2 months and 0.45% to 0.93% for 3 months. It is clear that counterparty risk has increased heavily and lenders are anticipating troubles in the summer.

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Kostas Kalevras

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