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Prospects Daily: German industrial production rebounds, but European market sentiment remains weak

Global Macroeconomics Team's picture

Important developments today:

1. European market sentiment weakens amid renewed pessimism

2. Industrial production rebounds in Germany but declines in Italy


European market sentiment weakens amid renewed pessimism. European stocks sank and the euro declined against the dollar and the yen after Germany reportedly rejected combining the current and permanent region’s bailout funds, damping hopes that this week’s European Union summit will provide a much-needed solution to stem the region’s debt crisis. The benchmark Stoxx Europe 600 Index fell 0.6% in afternoon trading, led by the banking sector, after earlier climbing as much as 1.2%. Last week the index posted its largest gain since November 2008, but it dropped 0.3% yesterday after S&P’s warning of a potential downgrade for 15 euro-nations’ credit ratings.  The euro extended its loss, weakening 0.3% to $1.3366 versus the dollar and 103.86 yen, respectively. Meanwhile, German bunds advanced, dragging 5-year bond yields down to the lowest levels in two week, while Italian and Spanish bond yields rose as pessimism on a quick solution to the debt crisis returned.

Industrial production rebounds in Germany but declines in Italy. Supported by resilient domestic demand amid the ongoing euro debt crisis, industrial production in Germany rebounded by 0.8% (m/m) in October following two months of decline. In contrast, in the Euro Area’s third largest economy, Italy, industrial production dropped 0.9% (m/m) in October following a 4.6% (m/m) contraction the previous month. Momentum growth, for both Italy and Germany (-0.8%, 3m/3m saar) for the three months to October, remain negative thus pointing to a decelerating trend [see Chart at http://prospects or]. Further, forward looking indicators from business surveys show a contraction in manufacturing activity for both countries in November. Hence, today’s data release is supportive of a likely contraction in fourth quarter GDP growth in Italy, whereas while Germany is likely to continue growing, fourth quarter growth in Germany is likely to be below the 2.0% (q/q, saar) growth attained in the third quarter. The European Commission forecasts Euro Area GDP growth in the fourth quarter to contract by 0.4% (q/q, saar) and to stagnate in the first quarter of 2012.

Among Emerging Markets

In Central and Eastern Europe, Armenia’s central bank left the key refinancing rate unchanged at 8% at the last policy meeting after a 50 basis points cut in September. Annual inflation has been easing in recent months falling to 4.8% in November from 5.7% in October and 6.2% in September, coming close to the central bank’s target range of 2.5-4.5 percentage points.

In Latin America and the Caribbean, Brazil’s economic growth abruptly stalled in the third quarter as the increase in real GDP from the second quarter recorded a dismal 0.1% growth. Growth was weighed down by global economic uncertainties and the central bank’s measures earlier in the year to tighten credit and dampen domestic demand. The central bank has stated that this slowdown was largely expected and will likely reverse in the fourth quarter. Indeed, the bank began easing interest rates in August (when inflation still exceeded the target 4.5% rate) with three consecutive cuts to the benchmark Selic rate bringing it down to 11% by November.

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