It hasn’t been a great day on the data front in Europe. France slipped back into recession, Germany narrowly missed a contraction in the first quarter, and GDP for the broader euro zone showed the recession extended into a sixth straight quarter,the longest recession on record, according to Reuters.
Yet, European stock markets celebrate the data like this current rally has no end. Germany’s DAX 30 index is flirting with an all-time high, while the benchmark Stoxx 600 index is eyeing the highest closing level since June 2008. Confused?
Well, with central banks aggressively supporting financial markets in a time of sluggish growth, bad news can be interpreted as goods news because they increase the likeliness of further central bank action.
“The outcome of euro zone GDP hasn’t triggered a reversal of the bullish tone as many believe that this will only push the ECB to consider options to provide further stimulus measures and also in part that the Q1 period was affected by cold weather conditions which stalled growth for the core regions,” said Ishaq Siddiqi, market strategist at ETX Capital, in a note.
Two weeks ago, the European Central Bank lowered its key interest rate to a record low of 0.5% and ECB President Mario Draghi has since hinted at the possibility for further easing if conditions continue to deteriorate.
And for most of the euro zone, data deteriorated in deed. Both Italy and Spain saw their economies shrink 0.5% in the first quarter, while France’s GDP dropped 0.2%. Whether the data sent the French economy into a triple-dip recession created some confusion, as revisions of earlier data seemed to spare the country from a tri-fold downturn. In either way, the past two quarters showed a weakening in growth, sending the economy into recession in the first quarter.
Meanwhile, Europe’s largest economy Germany also reported GDP data below expectations, with just a 0.1% expansion rate for the period.
“The readings from both powerhouses in the core euro zone are worrying, suggesting the region is stuck in a recessionary trend. Germany’s economy failed to pick-up momentum during the period while the French economy contracted more than expected,” said Ishaq Siddiqi, market strategist at ETX Capital, in a note.
The Bank of England was also on the spotlight on Wednesday. Governor Mervyn King said on the release of the bank’s quarterly inflation report that “there is a welcome change in the economic outlook.”
“Today’s projections are for growth to be a little stronger and inflation a little weaker than we expected three months ago. That is the first time I have been able to say that since before the financial crisis. But this is no time to be complacent – we must press on to ensure a recovery and bring down unemployment,” he said.