Economic update:
The unlikely champions

Eurozone periphery grows faster than the core

Around half of the Eurozone failed to grow in the second quarter

The “soft core” of the Eurozone was on full display in the second quarter of the year, as Germany, France and Italy all failed to grow. Germany shrank by 0.2% quarter-on-quarter; Italy slipped into recession for the third time since 2008; and France faced a second consecutive quarter of zero growth.

We expect that Germany will recover its form in Q3, as the Q2 contraction was partly driven by temporary factors: a strong Q1 and an escalation of the Ukraine/Russia stand off, while German fundamentals remain relatively strong. We’re less optimistic about the other core countries.

Look out for the unlikely champions

Meanwhile peripheral economies like Spain and Portugal rebounded. Spanish output grew by 0.6% quarter-on-quarter, which is the fastest rate in more than five years. The effect of stronger growth can already be seen in Spain’s unemployment rate, which has been on a downward path since the end of 2013 (see Figure 2). We expect a similarly strong performance to continue into Q3 for most peripheral economies on the back of a robust tourism season.

Based on this analysis, we have revised down our Eurozone main scenario projection from 1.1% to 0.8% for 2014 to reflect the weakness of the three core countries.

Fig2 Spanish GDP grew its fastest rate since the fourth quarter of 2007

Fig2 Spanish GDP grew its fastest rate since the fourth quarter of 2007

Fig2 Spanish GDP grew its fastest rate since the fourth quarter of 2007

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