Euro suffers after eurozone recession continues into 2013
The euro fell across the board Wednesday morning after the release of economic growth figures showed that the eurozone economy remained in recession for a record sixth consecutive quarter. As a collective, the economy of the 17 member countries contracted by 0.2% in the first three months of 2013, following a fall of 0.6% at the end of last year. The euro fell to a 6-week low against the dollar, below 1.29 and fell by around 0.75% against the pound.
Most of the individual country's figures were worse than expected with France, the euro areas second largest economy back in recession for a second time in the past four years. Italy's recession continued for a seventh consecutive quarter, contracting by a further 0.5%. Germany narrowly escaped recession with growth of just 0.1% which was less than expected, with the figures for the end of last year also being revised lower to show a contraction of 0.7%.
It's unlikely these figures will have surprised anyone who pays even just the slightest attention to the news. The eurozone has some deep and entrenched issues that have come to light over the past few years and that are having to be dealt with. Most notably that several economies in southern Europe had been growing predominantly thanks to increasing government borrowing and spending. Now that Germany has a hold of the purse strings and global investors have demanded much higher rates of interest to lend money to these countries; the craters are there for everyone to see. The calls to ease the austerity measures that continue to damage confidence and hamper growth prospects will no doubt continue to increase but publicly at least, Germany remains opposed to dramatically changing deficit reduction targets. There will also likely be additional pressure from politicians on the ECB to do more to try to stimulate the economy though with interest rates at record lows of 0.5%, they may be limited in increasing demand. Monetary stimulus alone cannot undo the impact of economies that were largely dependent on state borrowing that is no longer as available, or in some cases not at all.
With confidence sapped and sentiment even in Germany at the lowest levels for some months, the euro area looks like it could be in for a very tough couple of years with rising unemployment a problem that shows no signs of abating. We expect to hear more from Mario Draghi in the coming weeks about what part they can play in any recovery but there is unlikely to be a magic bullet that fixes the economy. We are looking for the euro weaken to 1.25 against the dollar and sterling to finally hit 1.20 through the summer.
By Andy Scott, premier account manager at foreign currency exchange brokers HiFX