Global Daily – Euro consumer regains traction

by: Aline Schuiling , Tom Kinmonth

Euro Macro: Retail sales signal pick-up in consumption growth in Q2 – The volume of retail sales in the eurozone expanded by 0.4% mom in June, following a 0.1% rise in May. The data suggests that retail sales as well as total private consumption growth strengthened in Q2, after it slowed down in Q1. Indeed, the 3m-o-3m growth rate in retail sales increased to 0.9% in May, up from 0.3% in March. The slowdown in consumption in Q1 was probably related to the jump in (energy) inflation in the first months of the year. However, since the middle of April, energy prices have come down noticeably again, which has depressed total inflation as well. Moreover, private consumption probably will have benefitted from the labour market recovery gathering momentum in Q2. We think employment growth picked-up in Q2, as it tends to follow changes in economic activity with a delay and the increase in GDP growth after the first half of 2016 has not translated fully yet into stronger job growth. Finally, consumer confidence has jumped higher in recent months, with the component that measures the plans to carry out major purchases reaching its highest level in almost ten years. Overall, with exports and investment spending running strong and consumers return to the shops, the eurozone economy looks set for ongoing above-trend growth. (Aline Schuiling)

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Euro Financials: European authorities approve use of Italian taxpayer money – There was another step forward in the Italian banking saga today, as overnight the European Commission approved Italy’s plan to use state money to recapitalise Monte dei Paschi di Siena. The plan, which has been eight months in the making, was approved on the basis of an effective restructuring plan. Today in response, the Italian bank released a sweeping plan to slash branch numbers and staff, by 1,400 and 5,500 respectively. As broadly expected, the bank will break its shackles from the EUR 29bn bad loans that it has built up. The bank will indeed be leaner and far stronger, although projections for the bank do look rather optimistic, especially in regard to default rates on new loans. Unlike the recent Spanish bank rescue of Banco Popular, once again the Italian authorities will use taxpayer money in their bank rescue attempts. In this case, the Italian government will pump EUR 5.4 billion euros into the bank, in return for a 70 percent stake in the bank. Italy’s banking sector woes are unlikely to be resolved with this deal. The country has a chronic bad loan problem, for which provisioning is not high enough. In addition, a major rationalisation of the banking sector combined with consolidation still appears to be on the cards. The Italian banking sector still trails European peers on return on equity, and drastically need to catch up in regard to digitalisation. If an investment is desired at Italian bank subordinated levels, we still prefer to invest in AT1s of country champions from Northern European countries. (Tom Kinmonth)