Finance

Finance

Eurozone is about to exit recession

14 August 2009 09:21 (UTC +04:00)

Baku. Vahab Rzayev â€“ APA-Economics. The euro zone is likely to exit from recession in the third quarter thanks to a combination of stronger global demand and government stimulus that boosted its performance above expectations in the second quarter.
The euro zone economy shrank, but only just, by 0.1 percent in the second quarter with Germany and France posting a surprisingly early return to growth, data showed on Thursday
But high and rising unemployment, falling credit to companies and large excess production capacity, likely to limit corporate investment, are still headwinds the economy of the 16 countries using the euro will have to grapple with.
The faster exit from recession will make the European Central Bank less likely to cut interest rates further and shift the bank’s focus towards withdrawing liquidity from the market, with some rate tightening possible in 2010, economists said.
The European Commission and some economists have forecast the euro zone would only return to quarterly growth at the start of 2010. With a third quarter start looking now likely, economists have revised upwards their GDP forecasts for 2009 and 2010.
Commerzbank raised it GDP forecast to -3.5 percent for 2009 from -3.8 percent and kept its 2010 view unchanged at +1.5 percent. Goldman Sachs also said it would raise forecasts.
Unicredit raised its forecast for 2009 to a contraction of 4.0 percent from 4.6 percent and for 2010 to growth of 0.8 percent from 0.1 percent and Capital Economics revised its 2009 forecast to -4.0 percent from -5.0 percent.
Global demand for euro zone exports is rising despite a stronger euro. In July, the new export orders index for the manufacturing sector rose to its highest level since last June of 48.3 from last month’s 43.7.
The pick-up in global demand is likely to keep euro zone exports growing, sustaining the recovery.
Record-low inventories are another positive factor. In July surveys showed the orders to inventories ratio, a key gauge of pressure on companies to raise production, jumped to a level not seen since January 2007, indicating factories were running down old stocks at a rapid rate.
While the de-stocking likely hit the second quarter result, economists said, it also means that as global demand rises, firms will seek to replenish inventories, boosting production and helping the recovery in the second half of the year.
The economy also got a boost from fiscal policy as governments pumped in billions of euros to raise investment and consumption.
One of the most successful schemes to help raise consumer spending proved to be a incentive for those who trade in their old cars for new ones, introduced by Germany and several other countries. Source: Reuters