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A less equal recovery between countriesA less equal recovery between countriesA less equal recovery between countriesA less equal recovery between countriesA less equal recovery between countriesA less equal recovery between countriesA less equal recovery between countriesA less equal recovery between countries

In 2014, the euro area's activity continues on its upward path with more balanced growth between countries. The predominance of more positive news in the last few months has led the EC to revise slightly upwards its growth forecasts for the euro area for 2014 and 2015. After two years of shrinkage, it is encouraging that the growth expectations for 2013 as a whole are reaching 1.2%. This year private consumption and investment are expected to play a more important role, which will reduce the economy's dependence to date on the foreign sector's performance. However, sustained growth in 2014 is only guaranteed if the process of reforms is firmly pursued, especially in the periphery countries, and if the banking union, crucial in order to reduce financial fragmentation between countries, is implemented efficiently and without any setbacks.

Growth is returning to the most vulnerable countries. As expected, GDP growth in the euro area speeded up slightly in 2013 Q4 (0.3% quarter-on-quarter compared with 0.1% in Q3). This advance places growth for the whole of the year at –0.4% and demonstrates that the recovery is on track. In addition to the good news of this confirmed return to economic growth, it is also important that this faster rate of advance was widespread. Germany led the improvement with 0.4% increase in GDP quarter-on-quarter, also accompanied by France which, in spite of its business indicators faltering at the end of last year, advanced by 0.3%. The figures also confirm that the recovery is spreading to other countries such as Portugal, Spain and Italy, also recording positive GDP growth rates in 2013 Q4 of 0.5%, 0.2% and 0.1%, respectively.

The periphery supports greater confidence in the euro area. The economic sentiment index produced by the European Commission continued to advance in February and reached 101.2 points. The contribution of periphery countries to this improvement was particularly notable. On average, over the last three months up to February, this index increased by 1.3 points in the periphery (Spain, Italy, Greece and Portugal) while the increase in core countries was smaller, namely 0.4 points. Therefore, although there is still greater confidence in the core countries, the more vulnerable countries seem to be making up the ground they had lost, suggesting that differences in the rate of recovery between the two groups will gradually narrow. This greater dynamism in the periphery, however, is not without risk, such as the political crisis once again affecting Italy after the resignation of its Prime Minister, Enrico Letta. He has been replaced by Matteo Renzi who, in principle, is keen on implementing far-reaching reforms. For the moment, the markets' reaction has been relatively limited and we will have to wait to see whether he is able to restore political stability, a crucial condition to carry out the necessary reforms in order to boost the economy.

The euro area consolidates its recovery in 2014 Q1. February's slight drop in the purchasing managers' index (PMI) for manufacturing, namely from 54.0 points to 53.0, does not detract from the positive trend of the last few months, in line with further growth in GDP during Q1 this year. However, the differences between the main countries in the euro area are still notable: the index stands at 54.7 points in Germany, clearly in the expansionary zone, while in France it is at a substantially lower figure of 48.5 points. The differences between the euro area's two largest economies are therefore still significant, once again confirming the solidity of the German economy as well as maintaining doubts regarding the ability of activity to pick up in France. It therefore comes as no surprise that the EC forecasts 1.8% growth for Germany in 2014, a clearly higher rate than the one predicted for France of 1.0%.

Germany leads the recovery. German GDP growth speeded up slightly in 2013 Q4 (0.4% quarter-on-quarter compared with 0.3% in Q3), placing growth for the whole of 2013 at 0.4%. Annual growth was boosted by private consumption and public expenditure while investment and the foreign sector contributed negatively. Although the growth rates over the last few years have not been very different from those recorded during the years prior to the crisis, the elements supporting this growth have changed: domestic and foreign demand seem to have swapped roles (see the Focus «The path of Germany's domestic demand» in this edition of the Monthly Report). Moreover, domestic demand is expected to continue boosting economic growth this year. More favourable financing terms and less uncertainty should lead to a gradual recovery in capital goods investment, which disappointed a little in the results of 2012 and 2013. Meanwhile, low interest rates and a robust labour market will support private consumption and investment in housing even further. Regarding the situation of the public accounts, these will remain balanced, helping the ratio of public debt to GDP to fall gradually.

Widespread improvement in consumer confidence in the periphery, albeit at differing rates and levels. On average, the advances made in the last three months up to February 2014 have been notable in Ireland, Spain and Portugal, namely 2.7, 1.9 and 3.2 points, respectively. The recent good performance by this indicator in Ireland clearly sets it apart from the rest of the countries in the periphery, although the recovery in confidence among Portuguese consumers is also very noteworthy. However, the figures show that the situation has yet to rally in Greece. This improved confidence in the periphery as a whole is expected to encourage household consumption over the coming months. In fact, apart from short-term erratic movements (+0.8% and –0.7% year-on-year in November and December, respectively), the series of retail and consumer goods in the euro area continues to show an upward trend.

Advances in the labour market will support private consumption. The recovery of economic activity in the euro area will have a positive effect on the generation of employment in 2014. However, the probably rise in the number of hours worked per worker (currently below its historical average) will lessen the impact on job creation. In any case, most of the indices related to employment expectations over the next three months still indicate a clearly positive trend. Once again, the role of Germany has been crucial in the more favourable trend for employment expectations in the euro area as a whole, with significant advances both for the services sector and also manufacturing. Recovery in the labour market is key to boosting domestic demand and, for the moment, the bulk of the evidence available suggests that this process is on the right track. Consequently the rate of inflation, which usually has a slightly delayed reaction to underlying movements in domestic demand, is expected to gradually recover its upward trend (for a more detailed analysis, see the Focus «Breaking down the fall in inflation in the euro area»).

Exports recapture their good tone. After their excellent performance in 2013 Q1 (growing by close to 2% quarter-on-quarter on average), the rate of growth lost steam in 2013 Q3. However, the figures for 2013 Q4 have once again recorded an increase in the volume of exports as a result of growing demand for European products by countries outside the euro area. Data from European Commission surveys also show an increase over the last few months in orders from the manufacturing sector to other countries, now standing above their long-term average. Consequently, the foreign sector is still crucial in reactivating economic activity and, for the moment, all the evidence suggests that it will continue to play a vital role.

Reforms must continue in the different countries and within the European area. Although it is true that the more favourable data from the last few months have helped to improve growth prospects for most countries in the euro area, there are still many elements that could jeopardise this change in trend and most countries still have very little room to manoeuvre to overcome such challenges. The EC estimates that, for the whole of the euro area, public debt will peak in 2014 at 95.9% of GDP but it also acknowledges that this depends on both the recovery in economic activity and also on fiscal efforts continuing, especially in the most vulnerable countries. It is also essential for the banking union to be duly implemented during this year. Lastly, although financial tensions have gradually eased in the emerging countries, the risk is still high. One very notable aspect, however, is that there has been neither widespread contagion nor an escalation in the crisis and that investors are discriminating between countries.

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