Euro-zone out of recession, but still not out of the

According to the Flash GDP for Q2 2013, the euro-zone enjoyed a growth rate of 0.3%, ending 6 quarters of a recession. This growth rate also exceeded early expectations for 0.2% growth.

Returning to growth for the first time since Q3 2011 is good news, but quite a few issues. There are good reasons why the ECB pledged to hold rates lower and longer. Here are 4 things to worry about:

1. Core-periphery gap: the good news is that France returned to growth, and a solid one: 0.5% in Q2. So, the second largest economy is showing some strength. However, this 0.3% growth rate is based on the excellent German growth of 0.7% as well as the French one. Spain and Italy are still in recession, and so are quite a few other countries. There is no “positive contagion”.
2. Global worries: With China slowing down, Germany is unlikely to sustain strong growth. The Bundesbank expects lower growth in Q3. Also US growth is far from enough to push the whole world forward. Year over year, the output of the euro-zone is smaller, and it is expected to remain so in the next quarter as well.
3. Debt crisis issues are under the table: Despite official denials, it is clear that Greece will need a third bailout and that it has a funding gap. Portugal is muddling along, but could also require a second bailout. And Spain’s fall in unemployment could be only seasonal. After the German elections on September 22nd, the situation could certainly worsen.
4. QE Tapering a two edged sword: For many countries in the euro-zone, the exchange of the euro is too high. A lower EUR/USD would certainly help exports, especially in Spain and Italy. So, a “Septaper” that would yield a lower value for the common currency would certainly be welcomed by exporters. But, as we’ve seen with previous reactions to QE tapering hints, one of the outcomes is a rise in bond yields: in the US, in emerging markets and also in Europe. So while we might see optimism for exporters, funding costs for governments could rise.

So, despite the good news, the path for a European recovery is still very long.

Further reading:  Septaper is a close call both for markets and the Fed