Regarding our long-standing theme of rebalancing in the Eurozone, recent trends have been more negative, so we offer this summary with some relevant charts.

The first four months of the year are usually poor months on a non-seasonally adjusted basis for peripheral countries, so the return to current account deficits in Greece and Spain is not too surprising, but the strong improvement trend has clearly been broken. These countries’ domestic demand has also recovered partially and, thus, imports are rising, but if this trend continues, large current account deficits might re-appear. Two other key elements are whether tourism can continue growing strongly and whether foreign direct investment (FDI) can continue to increase.

Current Accounts in EUR BB
Not seasonally adjusted

Current Accounts in EUR BB

Source: Bloomberg, not seasonally adjusted

Spain’s current account data for May has yet to be released (as of the day of this writing), but its trade balance (in goods) for that month showed a similar deficit trend as the past two years .When including services, however, the BOP trade surplus will likely remain in surplus. The current account deficit is due to high income payments to foreign investors. These payments should decline along with recent bond yields, but the duration and timing of such is far from clear. Notably, in May, goods exports fell 1% YoY (the second decline in a row), but imports rose 7% YoY, neither of which are helpful trends in this regard.

As the chart to the above right shows, Portugal’s current account has also deteriorated into deficits this year. Exports of goods have been negative YoY for three months in a row through May, while including services, the trade balance has been approximately in balance.

Portugal: Current Account in EUR BB

Portugal: Current Account in EUR BB

Source: Bloomberg, not seasonally adjusted

Ireland’s 1Q current account remained in large surplus, so there is little to worry about. Like most other peripheral countries, if not for its strong improvement in external imbalances over the past few years, the country would have been in deep depression and probably would not have been able to remain in the Eurozone.

Italy’s current account has remained impressively in surplus in the first five months of the year. It has a solid trade surplus due to continuing strength in its exports, while imports remain subdued.

Italy: Current Account, 3-month average, in EUR MM

Italy: Current Account, 3-month average, in EUR MM

Source: Bloomberg, not seasonally adjusted