You are here

Draghi focuses on reviving economy with Greece on back seat

Monday, July 27, 2015 - 16:30

[ZURICH] Mario Draghi can take a break from being a full-time Greek crisis firefighter and get back to the job of fostering economic recovery across the euro area.

Although the 19-nation currency bloc has avoided losing a member and the market upheaval that might have entailed, reports this week will probably show the economy is hardly firing on all cylinders. Three years after Mr Draghi promised to do "whatever it takes" to keep the union together, the European Central Bank has its work cut out to speed up the pace of growth and inflation.

A weaker euro and the ECB's quantitative-easing program are helping the economy find its feet, with the second quarter forecast to show a ninth quarter of expansion. Consumer-price growth remains too low, however, and unemployment, particularly in southern European states, is stubbornly high.

"The Greek issue moves from page 1 to 2 or 3 in the minds of traders and economists," said Holger Sandte, chief European analyst at Nordea in Copenhagen.

"Now attention turns to more classic macro style things."

The euro-area jobless rate was little changed at 11 per cent in June, while inflation held at 0.2 per cent in July, according to surveys of economists before data this week. Economic confidence probably dipped this month, while Germany's Ifo business climate index unexpectedly rose for the first time in three months.

The euro-area economy maintained its growth at the start of the third quarter, weathering strains on confidence from the crisis in Greece, judging by a closely watched manufacturing and services index. Still, that barometer also showed German factory growth weakened, with exports falling for the first time in six months. In France, manufacturing has shrunk in all but one of the last 15 months.

"It's better but not good - we are improving from an extremely low level and have awful lot of catch-up to do," especially on investment spending, said David Milleker, chief economist at Union Investment Privatfonds GmbH in Frankfurt.

The ECB sees the economy growing 1.5 per cent this year, picking up to 1.9 per cent in 2016. Price growth will be almost non-existent in 2015, at 0.3 per cent, though the ECB expects its bond buying to help push that to 1.5 per cent next year.

The euro's drop of almost 10 per cent against the dollar in 2015 is helping export competitiveness, while lower oil prices and a strengthening U.S. economy are to the benefit of the currency bloc.

Daimler AG posted record operating profit in the second quarter on Mercedes car sales, and Publicis Groupe SA, the owner of advertising agencies including Saatchi & Saatchi, said last month that growth will accelerate in the second half.

But recovery remains uneven, with industrial production growth weakening in the last quarter. German factory orders, a gauge of future output, slipped in May after two months of gains. German chemical-maker BASF now expects "somewhat weaker" growth for the global economy, industrial and chemical production this year.

While Mr Draghi tries to lift a recovery that's not yet fully fledged, he'll still have to keep an eye on Greece. The situation in Europe's most indebted state remains precarious and there are concerns that Prime Minister Alexis Tsipras will struggle to implement the reforms he's proposed in return for a new bailout.

"Its really difficult for Greece to carry out all the structural reforms - I think another argument will come up in the next few quarters," said Hiroki Shimazu, senior market economist at SMBC Nikko Securities Inc. in Tokyo. "If you look one or two years ahead, I think the chances of Greece getting ousted from the euro are greater than 50 per cent."

BLOOMBERG