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Published On: Wed, Sep 3rd, 2014

Manufacturing and services sectors shine in Spain and Ireland as Italy and France contract

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Spain’s economic outperformance of the euro zone, clearly demonstrated by the August PMI numbers, points that time is running high for structural reforms in the EU; policy makers are meeting tomorrow to discuss the necessity of new measures to prevent deflation.

Spain’s economic outperformance of the euro zone, demonstrated by the August PMI numbers, point that time is running high for structural reforms in the EU.

Growth in manufacturing and services sector accelerated in Spain and Ireland last month, as these countries’ governments propped competitiveness to compensate for bailouts, whereas for Italy and France PMI figures indicated a contraction. A composite index for the EU slumped to a lower than initially expected value, to reach its lowest so far this year.

The European Central Bank president asked governments to boost monetary and fiscal policy by means of structural reforms, to aid the euro zone economy grappling with stagnation during the second quarter on account of vulnerability to geopolitical risks. His move refueled the debate regarding most countries’ austerity policies in the wake of the debt crisis. Tomorrow policy makers are convening to debate the need for new measures to prevent deflation.

It is thought that Spain’s and Ireland’s accelerated growth will encourage Mario Draghi to underscore that other countries’ sluggish recoveries are hampered by the lack of adequate structural reforms, and that if governments refrain from tougher measures to prop productivity and competitiveness, even further ECB action will not succeed in aiding economic performances.

The Composite PMI in the euro zone declined, from 53.8 to 52.5, the lowest since December, thus failing to reach the preliminary 52.8 reading of August 21.

The lack of growth in the EU, including its three biggest economies, together with lowering inflation expectations, have spurred a debate regarding quantitative easing. According to economists, despite augmented chances for large scale assets purchases this year, ECB policy makers are not likely to hurry with a decision.

Tomorrow new economic forecasts are due and policy announcements will be channeled by them. In June the ECB introduced a stimulus package with a negative deposit rate and targeted long-term loans to banks; it forecasted 1 percent growth this year and 1.7 percent next year. Euro zone expansion, however, is expected to be flat for the remaining two quarters.

Spain looks ready to outperform the euro zone, though two years ago it applied for EU rescue. Its growth in the second quarter is 0.6 percent, and the Bank of Spain forecasts positive 1.3 percent and 2 percent for 2014 and 2015, respectively.

The Composite PMI in Spain changed from 55.7 in July to 56.9 in August, the highest since March 2007. An Ireland industry gauge jumped from 60.2 to 61.8, a level not attained for the last 14 years.

In contrast, in Italy the composite PMI slumped from 53.1 to 49.9, contracting for the first time in the last nine months. Italy’s economy grew in just one of the last 12 quarters; in the three months until June it slid into its third recession since 2008. The French gauge increased from 49.4 to 49.5. The German index declined to 53.7, a 10-month low.

The Italian Prime Minister Renzi offered an EU summit on growth, while the French PM Valls urged the ECB to take more action. The German Finance Minister Schaeuble’s words that deficit-boosted growth yields economic decline pointed a dissent among the governments of the EU’s largest economies.

The slowing momentum demonstrated by the euro zone economy will likely further urge the ECB to unfold full scale quantitative easing, according to economists, though it may still be too early to expect that.

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