Eurozone: Negative statistics bring deflation and recession closer

Michel Barnier, Member of the EC in charge of Internal Market and Services, gave a press conference following the adoption by the EC of measures to improve the corporate governance of around 10 000 companies listed on Europe’s stock exchanges. This doesn’t seem though to help much the SMEs which account for 99.8% of EU companies and don’t have access to capital market financing. (EC Audiovisual Services, 09/04/2014).

An avalanche of disappointing statistics on Eurozone was released during the last two days, supporting the view that the single money zone is stuck in economic stagnation. The Business Climate Indicator (BCI), Economic Sentiment Indicator (ESI), the annual inflation and a euro area bank lending survey, all those statistics for April show that the euro area lacks the strength to definitively exit from the current economic conjuncture, characterized by close to zero growth and inflation.

During the past twelve months, after the second quarter of 2013, Eurozone has stopped receding, but its growth potential doesn’t seem to exceed a few decimal points, while Eurozone seems threatened by falling inflation leading possibly to deflation. On top of that, those few decimal points of overall growth (average) hide the fact that many member states still suffer from deep recession. Let’s take one thing at a time.

According to the Commission’s Directorate General for Economic and Financial Affairs (DG ECFIN), the Business Climate Indicator for the euro area “decreased slightly by 0.13 points to +0.27 in April. Managers’ evaluation of the past and expected production, as well as of the current level of export order books worsened, while their assessment of overall order books improved and their appraisal of the stocks of finished products remained broadly unchanged”. BCI estimates are based on an analysis of answers (aggregate balances, seasonally adjusted) to five of the monthly questions addressed by the EU Commission to Eurozone firms in the context of the monthly industry survey (only employment and selling-price expectations are excluded).

Always decreasing economic sentiment

As for the Economic Sentiment Indicator, it decreased slightly in April in the euro area (by 0.5 points to 102). More precisely, the Commission stresses that “the slight decrease in sentiment was mainly due to a worsening of confidence in services and construction”. In those two sectors confidence still scores below its long-term average. “In industry and retail trade, sentiment remained virtually unchanged compared to March. Confidence among consumers improved. Amongst the five largest euro area economies the ESI declined in the Netherlands (-1.0), Spain (-1.0) and Germany (-0.4), remained broadly stable in France (-0.3) and increased slightly in Italy from a very low place (+0.5).

Deflation remains a prospect

Passing now to inflation, this crucial variable always remains subdued in the Eurozone. According to Eurostat, the EU statistical service, euro area annual inflation is expected to have increased slightly to 0.7% in April, from 0.5% in March. This is the standard flash estimate by Eurostat of the closing month’s inflation rate. The same source observes that among the main components of euro area inflation, “services is expected to have the highest annual rate in April (1.6%, compared with 1.1% in March), followed by food, alcohol & tobacco (0.7%, compared with 1.0% in March), non-energy industrial goods (0.1%, compared with 0.2% in March) and energy (-1.2%, compared with -2.1% in March).”

On many occasions this newspaper has pointed out that price developments in the sector of the ‘non-energy industrial goods’ constitute the main indicator of what happens in the ‘heart’ of every developed economy. After November 2013, consumer price developments in this crucial productive activity are stuck around 0.1% to 0.2%. This is very close to the negative area. The problem is though, that if the ‘Rubicon is crossed’ it will prove very difficult to return to positive grounds. In short, it’s already high time that Eurozone decision makers shaped the right expansionist policies to safeguard the euro area from a return to recession.

No bank credit for SMEs

Understandably, the worst hit business activities by the protracted stagnation in Eurozone are the SMEs in the south. The European Central Bank just released its survey on the access to finance of SMEs in the euro area for the period of October 2013 to March 2014. According to it the “SMEs reported a deterioration in the availability of bank loans, albeit to a lesser extent than in the previous survey round (-4% of respondents, in net terms, after -11% in the previous round). The survey results indicate a marginal decline in the rejection rate for euro area SMEs applying for a loan (11%, down from 12%). The survey results suggest that financing conditions for SMEs continue to differ significantly across euro area countries and are in general more difficult than those of larger companies”.

This is a direct recognition by the most competent source that the SMEs in the south are still facing existential problems being deprived almost completely of bank credit. The fragmentation of Eurozone’s financial market has reached such limits as if the north and the south belong to completely different economic areas. Bank credit is now free-flowing in the core countries, while the peripheral SMEs are been denied loans or charged extravagant high interest rate costs for comparable business risks.

All in all, there is no doubt that the ECB has to act quickly and reunite the euro area financial markets, before the Eurozone suddenly becomes politically impossible.

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