Market Commentary: Growth in three biggest Euro area economies slows

US

Recent data showing that US gross domestic product expanded at 4 percent annual pace in the second quarter has confirmed the US Federal Reserve’s view that the economic contraction in the first quarter was transitory. Employment data also confirms the trend as over 200,000 jobs were added for the sixth straight month in July, the longest such period since 1997.

The strength of the economy has surprised many and raised concerns that the Federal Reserve may be forced to act on rates sooner than anticipated. The US Central Bank will wind down its asset purchase program in October this year. US stocks last hit a high on the 24th of July when the S&P 500 index last closed at a record.

Subsequently US stocks fell by 3.9 percent as concerns that geopolitical crisis from Ukraine, Israel, Iraq and Libya may impinge on global economic growth. Yesterday the S&P 500 climbed 0.7 percent as events in these regions appeared to be calmer.

Asia

Asian stocks rose marginally on bets that the US Federal reserve won’t raise interest rates earlier than expected and speculation that Chinese policy makers will expand stimulus. The Chinese government is expected by many to take steps to support its 7.5 percent economic expansion goal. At least a rate cut, but most probably two are expected by the end of 2014.

Data collected by Bloomberg shows that 57% of Asian stocks have beat estimates from the start of the reporting season in July.

Europe

The Euro area recovery appears to have stalled as the three biggest economies in the region slowed down in the second quarter. German gross domestic product surprisingly shrank 0.2 percent while Italy slide back into recession. France is scraping its deficit targets as the economy appear to be stagnating. Germany’s weakness appears to have been transitory in the second quarter; however, the outlook is clouded by the impact of international measures against Russia.

The slowdown in Germany is particularly concerning since Europe’s top performer has acted as a balance to the peripheral region since the financial crisis of 2008. Low inflation in the Euro Area as a whole threatens price stability in the region and may add pressure on the European Central Bank to expand stimulus.

ECB President Mario Draghi has called for countries to implement structural reforms. Countries that have done so are recovering faster. The Spanish economy has expanded at its quickest pace since 2007 in the last quarter. Greece’s economy has contracted at its slowest pace in almost six years. European stock fell after the news.

This article was issued by Calamatta Cuschieri, visit www.cc.com.mt for more information.

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