Draghi’s Morality Tale Echoes as Euro-Area Economy Grinds

By Angeline Benoit and Catherine Bosley

Photographer: Angel Navarrete/Bloomberg

In Spain, where growth is projected to accelerate next year, the government will... Read More

Mario Draghi’s morality tale on the need for structural reform will resonate this week in data revealing Spain outshone the region’s biggest economies yet again.
Reports on Nov. 14 predicted by economists to show a recession in Italy, and marginal growth in France, Germany, and the euro area as a whole, will reinforce a parable the European Central Bank president tells every month. That theme has particular poignancy for Draghi, an Italian whose country has become the poster child of economic sclerosis.
Spanish wedding-dress designer Jordi Dalmau says he can see animal spirits taking hold in the economy from the way his creations sell. The lack of buoyancy elsewhere in the 18-nation region, which Draghi blames in part on a lack of effort by governments, may lead officials to
cut their economic outlook in December.
“After four years of doing nothing other than saving, Spanish people have started spending again,” Dalmau said in a telephone interview from Granollers, close to Barcelona. “Business is going much, much better than in previous years, there’s no comparison.”
With growth of 0.5 percent in the July-September period, the Spanish economy outperformed the German one for a second quarter, something it hasn’t done since 2007. By contrast, the euro-area economy probably expanded 0.1 percent, according to economists surveyed by Bloomberg News. Eurostat will publish that report following data from France, Germany, Slovakia, the Netherlands, Italy and Portugal.

Diverging Trend

“We expect a very heterogeneous outcome” for this week’s GDP reports, said Daniel Lenz, lead market strategist at DZ Bank in Frankfurt. “Those countries that have undertaken more reforms are now in a better state -- the examples of Ireland and Spain demonstrate that.”
Draghi has identified “insufficient progress” in structural reforms as a key downside risk to the economy. While the outlook for a modest recovery remains in place, a weakening in momentum signals cuts in the ECB’s staff projections, he said last week after policy makers kept interest rates unchanged. New forecasts are due in December.
In Finland, industrial production expanded 0.7 percent in September from the month earlier, its statistics office said today.

Forecast Cut

The European Commission already lowered its GDP outlook for the euro area and its largest member economies -- Germany, France and Italy.
In Spain, where growth is projected to accelerate next year, Economy Minister Luis de Guindos has committed that the government will continue the policies that turned the economy around -- changes to labor law and measures to encourage enterprise. Unemployment at 24 percent is still the second-highest in the region, and the government’s budget deficit won’t fall back in line with European Union rules before 2017.
Ireland, which exited its bailout program last December, will expand at the fastest pace in the euro region this year, the commission said.
Profit at Banco Santander SA (SAN), Spain’s largest lender, surged 52 percent in the third quarter as charges for bad loans dropped. Ryanair Holdings Plc (RYA), the Irish carrier that’s Europe’s No. 1 discount airline, upgraded its full-year profit goal this month, days after Air France-KLM Group (AF) and Deutsche Lufthansa AG said sluggish growth would weigh on demand.
Manufacturing data for last month painted a similar picture, with gauges for Ireland and Spain signaling some of the strongest expansions, while a downturn in France accelerated and Italy fell back into contraction.

Struggling Economies

“Most of the signs are that the euro-zone countries are still struggling,” said Howard Archer, chief European economist at IHS Global Insight in London. “If the euro zone does do a bit better next year, it’s largely because of external factors - - it’s got its problems.”
The ECB in Frankfurt has already unleashed a barrage of stimulus, including a negative deposit rate, long-term loans and asset purchases. Draghi said last week that more unconventional measures are being prepared in the event they’re needed, stoking expectations that the ECB will buy government bonds before long.
Economists at Nomura International Plc now predict a classic quantitative-easing program in the first half of 2015, while analysts at BNP Paribas SA expect a broadening of asset purchases to be announced next month.

Serious Intent

Investors should “feel more convinced that the euro will depreciate further and that prices of assets on securities from the euro zone’s periphery countries will rise,” said Andrew Bosomworth, managing director at Pacific Investment Management Co. in Munich. “From an economic perspective, households and corporations should feel more convinced that the ECB is serious about reflating the euro-zone economy.”
Back in Granollers, dress-maker Dalmau says sales in Spain, which represents 85 percent of his revenue, have hit 470,000 euros ($584,000) so far this year, compared with 400,000 for all of 2013. That’s despite the economic sobriety that has caught up with customers, who no longer take out bank loans for his gowns.
“Most clients now come when they’ve got the money to spend,” he said. “So if we’re seeing more of them, it’s a sign of improvement.”