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Prospects Daily: European shares and euro continue to slump

Global Macroeconomics Team's picture

Important developments today:

1. European shares and euro continue to slump as Moody’s cuts the rating outlook for Germany, the Netherland, and Luxembourg

2. Output in the Euro Area contracts for the sixth month in July

European shares and euro continue to slump as Moody’s cuts the rating outlook for Germany, the Netherland, and Luxembourg. The euro and European stock markets extended their losses on Tuesday as Moody’s Investor Service lowered its outlook for Germany, the Netherlands and Luxembourg. The rating agency changed the outlook on these countries’ AAA credit ratings from stable to negative, citing growing uncertainty about the Eurozone debt crisis and in particular a materially higher possibility that Greece will exit the bloc. Lingering concerns about Spain’s banks and regions’ financial health also weighted negatively on the region’s stocks and single currency. The benchmark Stoxx Europe 600 Index retreated 0.3% in afternoon trading, after plummeting 2.5% yesterday amid mounting concerns over Greece and Spain. Meanwhile, the 17-nation currency depreciated versus the dollar and yen for a fifth day on Tuesday, dropping 0.2% to $1.2089 and 0.5% to 94.54 yen, respectively.

Output in the Euro Area contracts for the sixth month in July. The ongoing European debt crisis, fiscal austerity, slowdown in trade, high unemployment and weak domestic demand are taking a toll on manufacturing and services activity in the Euro Area. In a report released today by Markit, the preliminary reading of the composite Purchasing Managers’ Index (PMI) for the Eurozone was unchanged at 46.4 in July, implying that manufacturing and services industries shrank at the same pace that they did in June (figures above 50 indicate ongoing expansion). Of particular concern was that output continued to fall in the region's two biggest economies, Germany and France, according to flash PMI data, indicating deteriorating conditions as domestic and export demand continue to falter. Although official data are not yet available, the PMI data signaled the steepest quarterly downturn in three years in the second quarter of 2012, according to Markit. Chris Williamson, Markit's chief economist, said that the flash PMI figures are consistent with Eurozone gross domestic product falling at a quarterly rate of around 0.6% and with manufacturing output falling at a steeper rate of 1%. The European Central Bank cut its key policy interest rate earlier this month to 0.75 percent in an effort to support growth.

Among Emerging Markets

In East Asia and Pacific, the pace of decline in manufacturing activity in China eased in July, according to the unofficial preliminary HSBC-Markit manufacturing Purchasing Managers’ Index (PMI) which rose to 49.5 in July from 48.2 in June (an index above 50 indicates expansion in activity). Both the new orders and exports sub-indices rebounded, but remained below the 50 mark. The unofficial PMI data is likely to ease concerns of a hard landing for China’s economy and indicates that recent monetary policy easing and policy stimulus measures are likely having a positive effect on economic activity.

In Middle East and North Africa, consumer price inflation in Morocco almost doubled to 1.9% year-on-year (y/y) in June, a nearly one percentage point jump over a month earlier, with the increase driven mainly by food and fuel prices. Food prices, which account for about 40 percent of the CPI’s total weighting, rose 2% (y/y). Transportation costs however jumped by 4% during July, as the government raised gasoline and refined oil product prices by up to 27 percent, the largest increase in several years, as it attempts to reform the country's subsidy system (the “compensation fund”) in order to improve the fiscal balance. The government spent about 6 percent of GDP on food and fuel subsides in 2011.