Economic prospects for Eurozone peripheral economies remain grim but some recent news has been less negative:

• Real money contraction – which predicted the current fall in output – has slowed. Indeed, aggregate real M1 deposits in Greece, Ireland, Italy, Portugal and Spain were unchanged between February and June, suggesting economic stabilisation in late 2012. (July figures are released next week.)

• Euro weakness and cost containment have improved external competitiveness. Relative unit labour costs in the five economies fell by between 1.3% and 7.1% between the third quarter of 2010 and the first quarter of 2012, according to the ECB’s real effective exchange rates (REERs) – see previous post. Spain’s REER is now below its EMU starting level.

• The aggregate trade balance of the five economies was in surplus in June for the first time since EMU’s inception – see first chart. This mainly reflects a fall in imports related to slumping domestic demand but exports have been growing modestly despite weak destination markets and credit constraints – second chart.

• ECB lending to the Eurozone banking system has stabilised since mid-year, consistent with a slowdown in capital flight from the periphery.

• Greece still needs to agree and implement substantial new cost-cutting measures but official state budget numbers suggest that this year's planned deficit reduction is on track – the primary shortfall declined to 1.8% of GDP in the 12 months to July.

These developments are insufficient to warrant optimism but the improvement in news at the margin may increase the chances of new policy initiatives – such as the Draghi bond-buying plan – succeeding in turning around market sentiment.