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Eurozone economic growth moderates: no need for concern

Economic Comment

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  • In the first quarter of 2018, the Eurozone economy grew by 0.4 percent compared to the previous quarter, after 0.7 percent quarterly growth in the final quarter of last year
  • We believe the current growth moderation is mainly the result of a combination of a return to trend growth and temporary factors
  • This growth figure is unlikely to derail the ECB’s timeline for policy normalisation
  • Spain’s economy again performed really well with 0.7 percent quarterly growth, while in France quarterly growth slowed to 0.3 percent and also Germany’s economy expectedly performed worse than in the final quarter of 2017

Growth moderation and temporary factors

Eurostat’s flash estimate for Eurozone GDP came in at 0.4 percent quarterly growth, in line with the consensus estimate. Although details will not be released for some time, the contribution of net-exports is likely to have been a lot less positive than in previous quarters, perhaps even slightly negative. Combined with a moderate slowdown in growth of consumer and investment spending, this explains this weaker number. The 0.4 percent quarterly increase compares to a 0.7 percent gain in the final quarter of 2017, but we already argued before that such rates of growth were not likely to be sustained.

That said, the slowdown is somewhat stronger than we anticipated during our latest forecasting round back in March. Then we predicted quarterly growth of 0.6 percent for the first quarter. Still, we expect that the current moderation is mainly the start of a return to trend growth and not the beginning of a sharp slowdown. In fact, we think a small rebound in the remaining quarters of this year is in the cards, because transitory factors played a role in the weaker activity in the first quarter, especially in France and Germany. Altogether, we will likely lower our GDP forecast for 2018 of 2.4 percent by a few decimal points to slightly above 2 percent during our next forecasting round, to be published in June.

Figure 1: PMI figures still point to decent growth
Figure 1: PMI figures still point to decent growthSource: Macrobond, Rabobank
Figure 2: Spain outperforms peers again
Figure 2: Spain outperforms peers againSource: Macrobond, Rabobank

ECB unlikely to alter policy based on recent figures

Even though the slowdown in data in recent months has been somewhat stronger than anticipated and was indeed the main point of discussion in the latest ECB meeting, we don’t believe that this preliminary first quarter GDP growth estimate will derail the ECB’s timeline for policy normalisation (see our take here). Especially, because we believe that the current growth moderation is only the start of a return to trend growth. Should we see an additional significant undershoot in the coming quarter(s), this is likely to lead to a further shift outward of the first rate hike. Whilst the market is currently still pricing for the first rate hike by mid-2019, we stick to our September 2019 call.

Spain again leads the pack

So far, of the large Eurozone countries, only France, Italy and Spain have published a flash estimate. With 0.7 percent quarterly growth, Spain’s economy grew at the same pace as in the final quarter of 2017 and again outpaced average Eurozone growth. While we expect growth to slow a bit in the largest Iberian country going forward, we should not be surprised if economic growth again approaches 3 percent this year. France and Italy both posted 0.3 percent quarterly growth and thus underperformed Eurozone peers by a touch. France surprised negatively, mostly due to temporary factors. An increase in social security contributions dampened consumption growth in the first few months. This is offset by a decrease in income tax, but households will only benefit from this at the end of the year as firms do not withhold income tax on a monthly basis. We remain positive about the outlook for the French economy, expecting growth to reach above 2 percent this year. For Italy, quarterly growth of 0.3 percent is not that bad, and in line with growth in the final quarter of last year. But obviously with such growth figures Italy’s economic recovery will not catch-up with that of its Eurozone peers. Looking forward, the country is expected to remain the laggard amongst the group, with 1.4 percent GDP growth this year.

Germany has not yet published a flash estimate, but based on monthly indicators and the Eurozone growth figure, we expect GDP growth to slow down from the final quarter of 2017. The cooling down of German growth, like some other Eurozone economies, was likely caused by a plethora of mostly temporary factors such as unusually cold weather, a flu epidemic, strikes (like in France) and perhaps fears over an escalation of trade sanctions with the US. Regarding the latter, while risks have increased, we don’t expect a severe escalation of tensions.

The upshot is, that we see the current growth moderation more as a combination of a return to trend growth and temporary factors, than as the beginning of a significant slowdown. But we do feel that growth in the Eurozone peaked at the end of 2017.

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