The periphery was the strong region in the euro area measured in terms of economic growth in Q2. Importantly, private consumption has started to increase in these countries as the unemployment rate has fallen and lower commodity price inflation has supported real wage growth. Most periphery countries have potential for more surprises as the hard negative shock has resulted in very high pent-up demand.
In the periphery countries, a third of the output gap is due to credit weakness. This suggests that enhanced credit growth should be very supportive for the recovery and, in light of this, the ECB's TLTROs are very important for the economic outlook. An ABS programme would strengthen the outlook further, as periphery banks still have a low lending capacity due to low capital ratios.
The ECB's negative deposit rate has initiated a hunt for yield and periphery rates have declined further in particular in the 2-5Y segment. The decline in yields is also supported by a positive rating cycle. Ireland has recently been upgraded and thereby obtained its second single-A rating and we expect Portugal to obtain at least one investment grade rating this year.
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