Fitch: Recovery in the Eurozone Periphery: a New Divergence
OREANDA-NEWS. Fitch Ratings says in a new report that a divergence has started to develop in the eurozone periphery as the economic recovery in the eurozone takes hold.
The cyclical position of the eurozone economy has improved substantially since the height of the eurozone sovereign crisis in 2012. Overall eurozone GDP bottomed out in 1Q13 to grow 3.7% until 4Q15. While the recovery has not been spectacular, GDP growth has been broadly stable at around 1.5% since 1Q15, and GDP growth has turned positive in all eurozone members except Greece.
Nevertheless, the recovery among member states is far from homogeneous and a new divergence has started to develop. The recovery accelerated significantly in 2015 in Ireland and Spain, outperforming Portugal and Italy where the recovery remained sluggish.
The report compares the recent macroeconomic performance of the four largest peripheral countries - Italy, Spain, Portugal and Ireland - with a focus on the divergence and its potential drivers.
It finds that the macroeconomic and financial shock caused by the eurozone crisis, including cross-country contagion, was so large that it masked the underlying structural differences between peripheral countries. As the effects of the initial shock faded, country-specific factors have again become more relevant. The research suggests that external openness, medium-term growth potential, investment outlook and financial sector soundness are key, interlinked areas explaining the divergence.
Ireland is the most successful among the four peripheral countries and by most metrics an outlier. The recovery, and ultimately the growth potential, was helped by the high level of openness of the Irish economy, confidence in the financial sector was boosted by early bank recapitalisation, though the forbearance of NPLs prevailed for a longer period, and fiscal consolidation has continued during the recovery.
The medium-term growth potential of the Spanish economy has also improved since the crisis, albeit to a lesser extent than in Ireland. It is underpinned by the accelerating recovery of domestic demand, particularly investment, strengthening confidence and early resolution of financial sector stress.
By contrast, the recovery and the medium-term growth potential have remained weak in Italy and Portugal. Investments are barely growing, forbearance of NPLs and financial sector weaknesses prevail, while recent fiscal easing has failed to boost the recovery.