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Euro Area Crawls in Recovery as Car Sales Hint at Growth

Mercedes-Benz Gallery Showroom
Model convertible cars sit in a display case beside a Mercedes-Benz S350 automobile, produced by Daimler AG, inside the Mercedes-Benz Gallery showroom in Berlin. Photographer: Krisztian Bocsi/Bloomberg

The euro zone probably notched up a third quarter of growth at the end of 2013 in a recovery that has yet to convince Mario Draghi as he considers more stimulus.

With gross domestic product forecast by economists to have risen just 0.2 percent in the three months through December after climbing 0.1 percent in the prior quarter, the European Central Bank president has cited that data due this week as a focus of officials. They are preparing forecasts and a menu of possible policy measures for their decision in March.

In Spain, a frontline of Europe’s economic pickup after a record-long recession, retiree Candido Lopez and his wife Asuncion Diaz have already chosen to bet on the recovery. They held off buying a car last year for fear their son might lose his job, but have now decided that the time is right.

“The situation has improved in the sense that we’re out of the recession,” Lopez said as they stepped out of a downtown Madrid dealership for BMW AG cars in January. They will return this month to swap an 11-year old Citroen Zara for a new BMW X1.

Such decisions are priming Europe’s car industry for its first year of expansion since 2007, underscoring the turnaround in the economic outlook. Sales last year dropped to their lowest level since 1995 as Europe’s debt woes provoked the euro region’s longest recession since the 2008 financial crisis.

Domestic Demand

“Car sales reflect the improvement in domestic demand in response to slower fiscal austerity last year,” said Gilles Moec, European economist at Deutsche Bank AG in London.“Buying a car is the perfect example of discretionary spending, postponed when short-term prospects deteriorate, and the first to come back as labor markets stabilize and countries talk about tax cuts.”

Euro-region GDP data will be published on Feb. 14 at 11 a.m. in Luxembourg, part of a marathon of releases that begin with France’s report at 7:30 a.m. in Paris followed by data for Germany, the region’s largest economy, half an hour later. For the euro area, all 41 economists in a Bloomberg News survey predict growth, with forecasts ranging from 0.1 percent to 0.4 percent expansion.

“The economic recovery is slow but it won’t be derailed,” said Robert Wood, an economist at Berenberg Bank in London and a former Bank of England official. “What we’re seeing is a gradual exit from the euro crisis as the pain of fiscal adjustment eases and confidence returns.”

Car Sales

Among companies set to benefit from further spending, carmakers are predicting an increase in demand that won’t only be fed by their incentives and a government cash-for-clunkers program in Spain. U.S. firm Ford Motor Co.’s Stephen Odell last month said new-car sales in its 19 main European markets may rise almost 6 percent this year.

“GDP growth is turning around in the European market, including peripheral countries,” said Sascha Gommel, an automotive analyst at Commerzbank AG in Frankfurt. “Lower refinancing rates should also make companies more competitive with regard to leasing and financing.”

Gommel sees sales rising 3.5 percent in Europe this year, while International Strategy & Investment Group’s Erich Hauser, in London, predicts an increase of 4.2 percent. London-based analyst at Ernst & Young Anil Valsan sees gains of up to 3 percent due to weaknesses in France and Southern Europe.

Situation Stabilized

While European Automobile Manufacturers Association numbers are due on Feb. 18, available data for January new-car sales “are supportive of the recovery case,” said Hauser. Analysts predict Europe sales will extend the longest stretch of gains since 2010, rising on the year for a fifth month. In December, deliveries jumbed 13 percent, the most in almost four years.

Back in Madrid, Lopez, a 62 year-old former employee of Spain’s state-owned train operator Renfe, says his family’s situation has stabilized. Both his son and daughter-and-law escaped a job cull in the nation’s banking sector last year, after it was bailed out by the European Union.

While some consumer spending may be picking up, the ECB said on Jan. 29 that lending to companies and households still declined for a 20th month in December, shrinking 2.3 percent from a year earlier. In France, industrial production declined 0.3 percent in December from the previous month, while in Italy it fell 0.9 percent, according to data from the countries’ statistic institutes today. Both readings missed economist estimates.

Slow Recovery

Draghi says he stands ready to do more to boost growth after an unexpected slowdown in euro-area inflation.

Speaking on Feb. 6 after the ECB’s monthly decision, Draghi said that the snapshot of growth due this week will inform officials as they prepare quarterly forecasts and await final consumer price data for January.

Should the ECB decide to act next month, options might include another interest-rate cut from the current record-low 0.25 percent, ending the absorption of crisis-era bond purchases, or issuing fresh long-term loans to the region’s banks.

“Output in the euro area is expected to recover at a slow pace,” Draghi said. “We are willing and we are ready to act.”

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