Spanish Boom Meets French Stagnation as Reforms Drive Growth

The European Central Bank’s mantra that structural reforms are the signposts to sustainable economic growth is being reflected in Spain and France.

While Spanish manufacturing and services output accelerated in April at the fastest pace since 2006, France’s economy neared stagnation, London-based Markit Economics said on Wednesday. A composite Purchasing Managers’ Index for the euro area slipped to 53.9 from 54 in March, compared with an April 23 estimate of 53.5. A reading above 50 indicates expansion.

ECB President Mario Draghi has repeatedly called on euro-area governments to complement his 1.1 trillion-euro ($1.2 trillion) bond-buying program with growth-enhancing reforms to turn the current “cyclical” recovery into a “sustainable” one. United in scolding Greece for its intransigence, leaders have shown diverging progress in their own nations so far.

“Those countries which have made the greatest efforts toward reforms are enjoying the strongest economic growth -- Spain and Ireland in particular are both booming again,” said Chris Williamson, chief economist at Markit. The French “government needs to work harder to boost competitiveness and lift confidence among both businesses and consumers if France is not to be left behind in the euro area’s recovery,” he said.

Ifo Confidence

Economic confidence in the region surged to the highest level since 2007 in the second quarter, the Ifo research institute in Munich said on Wednesday. Gauges of current conditions and expectations both improved.

On Tuesday, the European Commission raised its growth forecast for the 19-nation economy to reflect the impact of a weaker euro and unprecedented monetary stimulus. Gross domestic product is forecast to increase 1.5 percent this year, up from a prediction of 1.3 percent in February.

While the outlook for countries such as Germany and Italy improved, France, the bloc’s second-largest economy, won’t expand in 2016 as quickly as forecast three months ago. The Commission also cut its growth projections for Greece.

The euro-area economy probably grew 0.4 percent in January-March period, according to a Bloomberg survey before data on May 13. PMI data signal an expansion at the same pace at the start of the second quarter, according to Williamson.

Economic Health

In the Markit report, Spain was one of the region’s top performers, with new business expanding at the fastest pace in almost 15 years, and Germany also reporting a “solid increase in economic activity.” The pace of growth in Italy accelerated to a 10-month high, while in France, service-sector growth slowed and a downturn in manufacturing deepened.

Since being hit by the crisis, Spain has liberalized its labor market and tackled the legacy of bad debt held by its banks. While Italy has started following the same road in recent months, French competitiveness-boosting efforts have lagged, according to economists.

Spain is among the countries benefiting from “the structural-reform drive triggered by the crisis,” said Christian Schulz, senior economist at Berenberg Bank in London. “We expect confidence indicators to consolidate at levels consistent with roughly trend growth in the coming months. That does not exclude spectacular performances like Spain’s but also not the continued lagging-behind of reform-resistant France.”

Source: Bloomberg