German imports rebounded strongly in January, suggesting that domestic demand in the country may be set to recover after an autumn downturn.

Imports rose by a seasonally adjusted 3.3% from the month before, helping to shrink Germany’s trade surplus.

Exports also rose, by 1.4%, driven by robust demand in the US and China.

Germany’s economy shrank 0.6% in the last three months of 2012, thanks to recession in its main eurozone export markets and tepid domestic confidence.

However, the Ifo survey of business confidence has pointed to a strong rebound in expectations for growth since the beginning of the year, although the January trade data is the first solid indication that economic activity in Germany is picking up again.

Other data for manufacturing orders and industrial output released last week suggested that the German economy remained stagnant in the New Year.

German domestic demand is expected by most economists to play a major role in boosting the country’s – and the entire eurozone’s – economy.

German banks are awash with cash, and borrowing costs for businesses and mortgage borrowers are low, helping to stimulate an upturn in the country’s property market.

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Carrefour faces ‘difficult’ year ahead in weak Eurozone

Carrefour, Europe’s biggest supermarket chain, says the year ahead will be tricky as recessions in Italy and Spain have hit demand.

The company said it would increase spending on its hypermarkets by about 2.2bn euros (£1.9bn, $2.9bn) to try to revive sales and profits.

But its profits fell less than feared and shares rose 5% in early trading.

Its operating income, which excluded one-off gains and losses, fell by 2.6% to 2.1bn euros.

In global terms, the company is the second-biggest retailer, beaten only by US giant Walmart.

Competing harder

Carrefour’s giant stores have been hurt by competition from specialist stores and online shopping.

The company is trying to cut costs and compete harder on prices.

It had expanded in emerging markets, including China and Brazil, but pulled out of non-core areas, such as Singapore and Colombia in 2012.

It has raised 2.8bn euros from selling these divisions.

Net profit from continuing business was 113m euros, after certain exceptional charges including changes to the company’s tax payment.

Carrefour has cut its net debt by 2.6bn euros to 4.32bn.

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Moody’s cuts Italy’s debt rating

Moody’s has cut Italy’s credit rating, warning that the country was likely to see a sharp rise in borrowing costs.

The rating was cut two notches from A3 to Baa2, two levels above junk status.

The move raised concerns of a contagion risk from Spain and Greece, pushed Italian bank shares down and kept the euro near two-year lows against the dollar.

Moody’s said that Italy’s near-term economic outlook had “deteriorated” and access to credit markets could toughen.

On Thursday, Italy had raised 7.5bn euros (£6bn) in one-year bonds at a much lower rate than previously, suggesting improved investor confidence.

On Friday, after Moody’s downgrade, Italy raised 3.5bn euros in an auction of medium-term government bonds, with the rate falling to 4.65% from 5.3% last month.

Weaker growth

Moody’s said in its statement that Italy was now “more likely to experience a further sharp increase in its funding costs or the loss of market access” for borrowing to service its budget.

The ratings agency added: “The risk of a Greek exit from the euro has risen, the Spanish banking system will experience greater credit losses than anticipated, and Spain’s own funding challenges are greater than previously recognised.

“Italy’s near-term economic outlook has deteriorated, as manifest in both weaker growth and higher unemployment, which creates risk of failure to meet fiscal consolidation targets.

“Failure to meet fiscal targets in turn could weaken market confidence further, raising the risk of a sudden stop in market funding,” Moody’s said.

Shares of Unicredit, the country’s largest bank by assets, fell 1.7% following the announcement. Intesa Sanpaolo, Italy’s biggest retail lender also dropped 1.6%. The euro fell to $1.2192 in early trade, close to levels not seen since June 2010.

Limited help

Last month, European Union leaders reached an agreement to enable two rescue funds, the European Financial Stability Facility (EFSF) and the European Stability Mechanism (ESM), to help debt-laden economies.

But Moody’s said “there is a limit to the extent to which these support mechanisms can be used to backstop such a large, systemically important sovereign” debtor such as Italy.

Italy is the eurozone’s third biggest economy after Germany and France. While its banks are less exposed to bad property loans like in Spain, the country has deep-seated structural problems including low productivity, an inefficient public sector and a sharp north-south divide.

The economy has recorded anaemic growth for years, despite having adopted the euro in 1999.

In April, the government cut its growth forecast for 2012, and now predicts a 1.2% contraction in the economy compared with the previous forecast of a 0.4% contraction. The IMF expects the Italian economy to contract by 1.9% this year.

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Italian election puts euro crisis back on the menu

Fears about the eurozone are back on the financial markets’ after a few brief months of belief that the worst was past.

Investors fear political uncertainty in Italy will delay its efforts to reform its economy and cut its debt levels.

The outgoing government was trying to lay the foundations for economic growth and to strengthen the public sector finances.

But these plans have been rejected by those in the electorate tired of tightening their belts. And with no clear majority it will be difficult to form a new government with an agreed programme.

Italy’s large government debt is a problem for the eurozone as a whole, so the currency has fallen along with shares across Europe. Other moves in the markets suggest Italy’s borrowing costs could rise.

Here are a selection of views from market commentators.

‘Market crisis danger’

Paul Mortimer-Lee, global head of market economics at BNP Paribas:

The Italian people have rejected the guy that the market liked, Mario Monti. What they have voted for is much less certain, unless it is uncertainty itself.

Markets hate uncertainty and they will take against this vote in a serious way. It is very bad for Italian growth, firms will delay investment, households will delay big purchases, foreigners will put less money into Italy, the ratings agencies will be thinking “‘do we downgrade Italy?” and the Italian borrowing costs will rise substantially.

This is going to knock 0.5% to 1% off Italian growth this year, and this is an economy that is already shrinking. At the end of the day there is no alternative to the austerity and the fiscal prudence that the European Union wants to see from its members.

The question is, how do they get the Italian people to realise that? It is clear the politicians won’t offer that up to them on a plate, as it is a recipe for being rejected. So the danger is we have to go back into a market crisis so that the Italian people will get up close and personal with the realities for the situation.

‘Angrier and hungrier’

Annalisa Piras, Italian journalist and documentary maker:

This is very worrying for other countries because what the voters have said clearly is they will punish very harshly anyone who goes for austerity.

The stark warning from Italy is that the voters are getting angrier and hungrier. There is a lot of poverty which is a part of this vote [result].

But it looks like there is not really an alternative. Whoever is in government will have to keep with austerity path set by Mario Monti.

‘Forced to ask for help?’

Ben May, European economist, Capital Economics:

The inconclusive outcome of the Italian election looks set to prompt a renewed bout of market pressure which may eventually force Italy to request a support package from the eurozone.

Given the particularly bleak economic backdrop for Italy and the growing risk that the next government will at best have a limited mandate to continue the reform process begun by Mario Monti, we would not be surprised if a sustained bout of market pressure were to force Italy to eventually to request some form of support package.

‘Risk of prolonged impasse’

Barclays Economics Research, European desk:

Political instability is likely to prevail in the near term and slow the implementation of much needed structural reforms unless a grand coalition among the PD (centre-left), PDL (centre-right) and CC (centre) parties is formed.

While important steps have been taken so far by the outgoing technocrat government to regain credibility among the financial markets and European partners, Italy cannot risk being trapped in a political impasse for too long, in our view.

Should that condition persist and the parties not be able to agree on a grand coalition, we think the likelihood of Italy applying for a precautionary credit line would increase.

‘Not the only bad news’

Jane Foley, Rabobank:

The optimism that carried asset prices higher of the start of the year has been given a sharp wake up in the shape of the Italian election result.

Events in Italy, worrying though they may be, are not the only piece of bad news in the markets. Though it is possible that the worst of the downturn may be past in Germany, recession persists in the eurozone and in Japan. The US, whilst in recovery mode, faces the prospect of a dose of fiscal austerity on March 1 which could shave 0.5% of GDP this year.

The results of the Italian election might therefore be a catalyst for markets to question last month’s optimism, but it is not the only reason.

‘Major blow to austerity’

Open Europe, a Brussels-based think tank:

[The majority] of Italians voted for parties that explicitly oppose austerity and, in a major upset, the Five-Star Movement led by comedian Beppe Grillo – who has called for a referendum on whether the country should leave the single currency – received over 25% of the vote.

Outgoing Prime Minister Mario Monti’s list mustered less than 10% of votes in both houses.

Although Italians remain pro-EU, this election was a major blow for the Brussels cash-for-austerity consensus, and any plans for structural reform in Italy are likely to be put on ice.

‘Italy ungovernable’

Ishaq Siddiqi, ETX Capital:

Peripheral bond yields, particularly Italy’s 10-year and 5-year are reaching for the ceiling again.

What is more worrying for investors is that the political deadlock in Italy would suggest that even if we do see a market-friendly scenario materialise with a reform-minded government taking control, the fact that Silvio Berlusconi managed to gain such an influence with his anti-austerity campaign means that we are likely to see a rise in civil unrest in Italy.

Italy is at present ungovernable and that may be the case for some time, so long as Italians are this divided on austerity.

The pressure this places on peripheral bond yields will also raise the spectre of bailouts for Italy but particularly Spain with markets of the opinion that if the Spanish 10-year pushes above the 6% mark, this would raise alarm bells and force the hand of the government to request a bailout from the ECB.

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