INSIGHT: Business spending behind Europe’s second-half confidence

13 July 2010 16:53  [Source: ICIS news]

By Nigel Davis

EULONDON (ICIS news)--The euro was under pressure again on Tuesday after Moody’s downgraded Portugal’s sovereign debt by two notches on the prospect of weak economic growth and concerns over government finances.

EU economies continue to struggle with the burden of excessive debt as they seek a more sustainable exit from the financial and economic crisis.

And while Germany appears to push ahead, its exports growing strongly, the weaker EU economies mired in debt and forced to take emergency budgetary measures continue to colour sentiment and raise further talk of a double-dip recession.

But that sentiment appears to be shifting and the outlook, while subdued, is more encouraging.

EU officials on Tuesday stressed again that the European banking sector was resilient and that there were mechanisms in place to deal with vulnerability. The EU’s Council for Economic and Financial Affairs (Ecofin) said it would release coordinated Europe-wide results on 23 July of the stress tests Europe had imposed on its banks .

Measures introduced to reduce national deficits were sufficient to exceed targets in 2010 in 13 member states, European Commissioner for Economic and Monetary Affairs Olli Rehn, said. He warned, however, of the need to substantiate budgetary targets for 2011 and beyond.

Rehn said that Portugal’s budgetary targets were ambitious, while confirming that the European Commission is looking at new rules governing credit rating agencies and even is considering the establishment of a Europe-wide ratings agency.

Just last week, European Central Bank (ECB) president Jean Claude Trichet suggested that the European debt crisis had subsided, given the stepwise measures that had been introduced to back the Greek recovery plan, tackle national budget deficits and establish a financial stabilisation fund for the pressured euro area with guarantees of €440bn.

“The ability of the Europeans to face up to a difficult situation seems to me to have been seriously underestimated initially,” he said in an interview conducted on 8 July, published in the French newspaper Liberation and on the ECB’s website.

And as the threat from the fiscal crisis subsides, so does the likelihood of it forcing a double-dip recession.

Europe’s economic growth in the first quarter was weak but analysts are suggesting that monthly production figures point to a stronger second and third quarter. Credit Suisse on Tuesday said it was forecasting non-annualised growth of 1% in the second quarter and 0.5% in the third. Other forecasts have suggested annual economic growth in Europe this year of 2%.

Business spending will underpin much of the growth in output, the bank said.

“Slowdowns and recessions tend disproportionately to be about corporate cutbacks,” its European economics analysts said in a daily note. “Yet there is no need for the corporate sector to cut back at present. It is in financial surplus - substantially so in the UK. Firms have very strong cash flow at current spending levels and do not need to reduce spending in order to achieve it.”

Momentum is likely to carry most EU nations through current economic uncertainty, the bank suggested. 

“The prospect of a renewed slowdown is being discussed as if it were not only possible - which it clearly is - but probable - which history says it isn't.

“On the contrary, the consistent pattern is that recoveries that start keep going. They don't start and then stop unless there is a new shock. That remains our presumption on this occasion and it continues to fit with the cyclical indicators.”

Growth may slow but there is a difference between perception and reality.

In chemicals, EU production output growth is expected to be moderate in the second half compared with the first.

In its most recent forecast for the sector, dated the start of June, trade group Cefic forecast a period of consolidation for the industry in the second half following stronger growth in the first six months of the year.

Chemicals output, excluding pharmaceuticals, was expected to grow by 9.5% year on year in 2010 but moderate to 2% in 2011.

Last week, Germany’s chemicals trade group VCI said it would maintain its earlier forecast for 8.5% production growth in 2010.

Germany’s chemicals production rose 13% in the first half, it said, but would be slowed by lower demand in the EU, its largest market, in the second half of the year.

($1 = €0.79)

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By: Nigel Davis
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