Eurozone Weekly Economic Briefing: 20 Apr 2012

After a period of relative calm in the first few months of the year, financial tensions in the Eurozone are reappearing. Peripheral country bond yields have risen significantly and share prices have fallen back from this year's highs. And the boost to investor confidence given by the ECB's loans to banks seems to be waning. Meanwhile, data on economic activity support our view that the Eurozone is in mild recession. We maintain our forecast that GDP will fall in Q1 and Q2 this year, leading to a 0.5% contraction in 2012 as a whole. And divergences within the Eurozone keep deepening. Doubts remain about the Eurozone's ability to prevent or manage a serious crisis, especially if significant bailouts are required for countries such as Spain or Italy. The extension of the Eurozone's firewall agreed on 30 March has been kept to the minimum that was acceptable to increasingly reluctant lender countries. The folding of the EFSF funds into the ESM is a welcome decision, but is not bold enough to remove any concern about the Eurozone's handling of future crises. Crisis prevention or management will continue to rely to a large extent on the ECB. No rate cuts seem to be on the ECB's agenda for the foreseeable future, and we do not expect any unless the recession deepens. But we do not expect any rate rise before 2014 either. Monetary policy support will continue to focus on the banking sector.