RaboResearch - Economic Research

Eurozone economic growth slows down

Economic Comment

  • In 18Q3, the Eurozone economy grew by 0.2% compared to the previous quarter, which is quite lower than in previous quarters and also below the expected 0.4%
  • France outperformed with 0.4% growth, Italy underperformed as growth stagnated in Q3
  • October PMI indicators showed a sharper drop than expected, indicating that a sharp rebound of growth in Q4 will probably remain elusive

Eurozone disappoints in Q3

Eurostat’s flash estimate for Eurozone real GDP growth came in at 0.2% Q-o-Q, below the consensus estimate of 0.4% and the 0.4% rate recorded in the first two quarters of 2018. The flash estimate is also substantially lower than the 0.6% Q-o-Q we forecasted in September. This means that we have to downwardly revise our 2.2% GDP growth estimate for 2018 during our upcoming forecasting round, to be concluded in December. Based on historical experience, it is likely however that the 2018 growth figures for the Eurozone will be upwardly revised at some point in the future, as we have explained here (Dutch only).

Figure 1: Eurozone economic growth slows to 0.2% in Q3
Figure 1: Eurozone economic growth slows to 0.2% in Q3Source: Macrobond

As we still lack a breakdown by expenditure components and only have limited national data available, it is difficult to give an exact explanation for the slowdown compared to the previous quarter. Yet available monthly data shows that Eurozone’s weak export performance in the first half year continues in the third quarter. We recall that the Eurozone’s export growth so far has mainly slowed due to less exports to emerging markets and the United Kingdom. On top of weak export performance, domestic demand is likely to lose some strength in the third quarter. This is partly because of growth normalisation, but temporary factors are also depressing growth (yet again). In Germany, for example, car output has been lower due to new emission standards. Meanwhile, investment growth across the block could have suffered from the worsened export environment and in Italy investment growth probably also slowed on the back of political turbulence. Looking across countries, activity seems to have been weaker than expected in most major countries, but especially Italy surprised negatively.

Looking ahead, the October PMI’s showed a sharper drop than expected and this seems to point towards a continued slowdown in Eurozone growth in the fourth quarter of 2018. In the short term, downside risks are mainly coming from a slowdown in emerging markets and ongoing tensions in the US trade conflict, which could hit Eurozone export growth more than currently expected, and from Italy where the government is on a collision course with the European Commission over its budget. The latter has led to substantially higher Italian borrowing costs, with adverse effects for the country’s banks and likely a negative impact on the country’s economy. So far, contagion to other Eurozone Member States seems to have been limited (Figure 3), but the more the situation escalates, the higher the risk that spill-over effects increase.

Figure 2: PMI points to further weakening in Q4
Figure 2: PMI points to further weakening in Q4Source: Macrobond
Figure 3: Limited contagion from Italian politics
Figure 3: Limited contagion from Italian politicsSource: Macrobond

Diverging paths for France and Italy

Figure 4: Eurozone economic growth disappoints
Figure 4: Eurozone economic growth disappointsSource: Macrobond

Belgium, France and Italy have also released their flash estimates. The Belgian economy grew by 0.4% Q-o-Q in the third quarter. French economic growth jumped from 0.2% Q-o-Q in the second quarter to 0.4% Q-o-Q in the third quarter. The most important drivers in Q3 were private consumption and investment. Confidence indicators point to lower growth in Q4, but a household tax relief measure could give a boost to household consumption. In Italy, economic growth stalled in the third quarter, with zero contribution by both net export and domestic demand. The former was anticipated, but domestic demand has performed much worse than expected. Most likely investment growth significantly slowed or even contracted and inventories were built down. While consumer confidence has held up rather well, producer confidence, especially in the industry sector, has substantially deteriorated over the past months. This is likely partly related to the political situation, but also to weak export orders. The outlook for Italy remains poor. The positive impact of expansionary budget measures next year will expectedly be largely (or even completely) nullified by rising interest rates on the back of increased risks around government finances and uncertainty about the economic outlook. Germany’s growth figure is not yet known, but given the Eurozone’s average we expect it to be rather weak as well.

Koen Verbruggen
RaboResearch Global Economics & Markets Rabobank KEO
+31 88 726 7864
Maartje Wijffelaars
RaboResearch Global Economics & Markets Rabobank KEO
+31 6 2257 0569

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