The tightening in sovereign spreads in the periphery since end of June is broadly in line with fundamentals
. In recent months, the economic outlook for euro area periphery countries has shown signs of improvement. Most of the soft indicators have started to increase. The improvement in soft data are also beginning to spill over to some hard data. The rapid increase in unemployment rates across the periphery has lost momentum and in some periphery countries the unemployed rate has declined slightly. Other hard data also show early signs of stabilisation in most periphery countries.
We look for a continued gradual improvement in data as the headwinds from fiscal tightening, credit tightening and fears of a euro breakup fade. On a six-month horizon, we expect the improvement in sentiment to support a slow stabilisation of domestic private sector demand, while export growth picks up more speed driven by the global recovery. Nevertheless, the short-term outlook remains challenging. The ongoing economic stabilisation is fragile and could derail in case of unforeseen shocks.
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