In fact, our indicator of global economic activity, ELIT, recorded a decline in July for the second consecutive month, mainly due to the current European context and, in particular, Eastern Europe. Inside of ofEurozone, il picture é extremely heterogeneous. In H1, the level of German exports was heavily penalized by lower imports from emerging economies and by the intensification of the crisis in Ukraine (in fact, 14% of German exports are destined for Eastern Europe). French economic activity was affected by the collapse of the construction sector caused by the Duflot law (at a cost of 0,4% of annual GDP). Finally, although the weakness of the Italian GDP in Q2 is more linked to problems of a structural nature, the decline in exports should be underlined.
Conversely, the recovery in Spain and Ireland appears to be well underway. In Portugal the unemployment rate continued to decrease, going from 15,1% in the first quarter to 13,9% in the second. Furthermore, the restructuring of the Portuguese financial institution Banco Espirito Santo demonstrates that the European mechanisms, aimed at containing the effects of contagion within the Eurozone banking system, are quite effective. Under restructuring, the burden of the "bad bank" falls on the shareholders and subordinated bondholders while the "good bank", i.e. Novo Banco, has been recapitalized without weighing on Portuguese public finances. The bail-in thus weighed only marginally on peripheral bond markets, although sovereign spreads have widened again since their mid-June lows.
What can we expect for the future? The latest ECB credit survey indicates that, towards the end of the yearfor the first time since 2011, lending to non-financial corporations could increase again on a monthly basis. In fact, credit market conditions have never been so favorable since 2007 and, as a result, we are now observing a rebound in credit demand. These data could positively surprise the current level of consensus, for which an improvement in credit growth is expected only starting from H2 of next year, ie when the ECB's maneuvers will begin to have an impact on credit volumes.
Furthermore, while there were no major announcements from the ECB last Thursday and higher US yields may trigger an uptick in volatility in Eurozone bond markets, the contraction of peripheral spreads is destined to continue over the next 12 months, especially in the light of the improved sustainability of the same peripheral public debt over the next 4 years. This means that financial and credit conditions could act as support for the improvement in economic prospects towards the end of the year. Furthermore, our Banks team continues to upgrade those banks that show better capitalization (the latest upgrade was carried out on Unicredit bank, revised from “–“ to “Neutral”).
Un other support to Eurozone year-end economic activity and the global economy more broadly, could be the recent one weakness of raw material prices, mostly of oil prices. Oil production has been plentiful this year, especially in America, despite some disruptions to Libyan supplies. Furthermore, given the sub-optimal level of global growth and the progress made in terms of energy efficiency, another decline in the price of oil is possible if no further supply blockages occur. Also in this case, geopolitical issues assume great importance: While most of Iraq's oil production is concentrated in fields in the south, well away from the fighting, the recent escalation of the Kurdish situation and the announcement that the United States will initiate air raids has heightened market concerns about the capacity of the Iraq to meet foreign demand (Iraq produces c.3.3mb/d of oil – c.3,5% of world oil production).
Overall, due to the uncertainty about the next developments in the Ukrainian conflict, it is unlikely that in the next two months we will be able to see an improvement in economic activity in the Eurozone. However, towards the end of the year, the expansion of corporate credit could provide some boost to the European economy. At the moment, the main risk to be evaluated is the possibility that the deterioration in market conditions may more than offset the improvements recorded on the credit and banking front and that it could even have a negative impact on the level of economic activity in the Eurozone. At this point we believe that the first scenario outlined, with improved economic prospects expected towards the end of the year, is still the most probable for Europe; however we will not have a clear news flow of macroeconomic data in the near term.
