Europe
Economic and Fixed
Income Review & Outlook
Euro-zone
The economy of the Euro-zone expanded by 0.1% (quarter
on quarter (q/q)) during the third quarter of 2013, following
a 0.3% (q/q) expansion in the second quarter. The two
consecutive expansions follow six quarters of contraction
since the fourth quarter of 2011. The third quarter expansion
was driven by 0.3% growth in Germany (the Euro-zone’s
largest economy), but was tempered by 0.1% contractions in
France and Italy (the second and third largest economies).
With much of the concerns over the breakup of the Euro‑zone
that dominated the last two years now being subdued
(regardless of whether or not the underlying problems still
exist or not) a sense of stability has permeated the European
markets. Italian and Spanish yields measured 4.4% and 4.3%
European Central Bank (ECB)
In response to the 0.7% rate of inflation, which falls short of
the European Central Bank’s target rate of 2.00%, the ECB
decided to lower its main refinancing rate by 25 bps to 0.25%
from 0.50%. The ECB also lowered the rate on the marginal
lending facility by 25 basis points to 0.75% while maintaining
the deposit facility at 0.00%. The institution expects that
these key rates will remain “at present or lower levels for
an extended period of time”. The ECB expects that the
economic recovery of the Euro-zone will continue at a slow
pace, due both to a recovery in demand driven by the ECB’s
accommodative monetary policy, as well as benefiting from a
gradual strengthening of demand for exports.
Credit Rating Changes
Standard & Poor’s lowered its long-term sovereign credit
rating on Italy to BBB from BBB+ on 9 July 2013. The outlook
on Italy’s credit rating is “Negative”. The downgrade was
based upon what S&P saw as continued deterioration in Italy’s
economic future, predicting a contraction of 1.9% in 2013.
The ECB expects that the economic recovery of the Euro-zone will
continue at a slow pace...
respectively at the end of the third quarter, falling short of the
7.0% critical level that repeatedly agitated markets in 2011
and 2012. The European Commission’s Economic Confidence
Indicator has reflected this improvement in 2013 as it rose
continuously from-26.3 at the end of 2012 to -14.5 at the end
of October 2013. During the same period, the Manufacturing
Confidence Index performed in a similar fashion, improving
from -13.8 to -4.8 while the Purchasing Managers Index
improved from 4 ܸѼ