RaboResearch - Economic Research

Eurozone growth accelerates in the first quarter of 2019

Economic Comment

  • Eurozone economy grew by 0.4% Q-o-Q in the first quarter of this year
  • Domestic demand in the Eurozone is expected to be the main driver as external demand was weak
  • Survey results suggest that the Eurozone got off to a weak start in the second quarter
  • Italy climbed out of recession in the first quarter of 2019, while Spain remains the Eurozone’s bright star

Eurozone growth picked up in 2019Q1

Figure 1: Manufacturing PMI pushes Composite PMI down during first quarter
Figure 1: Manufacturing PMI pushes Composite PMI down during first quarterNote: Purchasing Managers’ Index. If the index is above 50, this generally points towards growth in the period ahead. If the index is below 50, this generally implies a contraction for the period ahead.
Source: Macrobond

The flash estimate for Eurozone GDP growth came in at 0.4% Q-o-Q (the definitive figures are due on June 6). This is in line with our expectations and constitutes a pick-up in growth compared to the 0.2% GDP growth observed in the previous quarter. The exact breakdown of the expenditure components is not yet available, but monthly data suggest that domestic demand was the main growth driver. Retail sales picked up in January and February after a steep decline during the final month of 2018, while consumer confidence improved slightly during 2019Q1. Steady nominal wage increases in 2018Q4 and a multi-year low unemployment rate also bode well for household consumption. What’s more is that the domestically oriented service sector seems to be (relatively) unaffected by the slump in the externally oriented manufacturing sector providing further evidence that domestic spending held up well. Services PMI increased consistently throughout Q1, while the manufacturing PMI fell to its lowest level since April 2013 (Figure 1). The upshot is that growth in the Eurozone economy was likely driven by domestic demand in the first quarter of 2019, while net exports are unlikely to have contributed much as demand from outside the bloc was weak.

Pick-up in growth may be short-lived

Looking ahead, we do not expect the pace of Eurozone growth to persist into Q2, given the weakness in recent surveys. The Composite PMI declined for the second month in a row, while the up till now well-performing Services PMI decreased in April (Figure 1). Additionally, the decline in the Economic Sentiment Indicator in April suggests that the Eurozone got off to a slow start in the second quarter. This is mainly driven by a steep decline in industrial sector confidence, while consumer confidence also deteriorated in April. Nevertheless, a well-performing labour market and accommodative monetary policy keep supporting domestic demand going forward. In the coming months, key downside risks to economic activity are an escalation of the US-EU trade tensions, a faster than expected slowdown of the Chinese economy and the ongoing uncertainty surrounding Brexit.

Italy climbs out of recession, Spain remains a top performer

Figure 2: Italy climbs out of recession in 2019Q1
Figure 2: Italy climbs out of recession in 2019Q1Source: Macrobond

Several other countries also released their early estimates of GDP growth today. The Italian economy climbed out of recession growing 0.2% Q-o-Q in the first quarter of 2019 (Figure 2). Istat notes that domestic demand had a negative contribution, while net exports had a positive impact on growth. Weak domestic demand suggests that the positive contribution of net exports stems from a larger drop in imports than exports. We do not expect Italian GDP growth to pick up significantly during the rest of 2019, given the uncertainty surrounding government policy and the potential for a new budgetary row with the European Commission later this year. Spain again performed well, growing 0.7% Q-o-Q during Q1, which is 0.1%pp above the consensus forecast. Household spending may have benefitted from the recent minimum wage hike, while also net exports provided a small boost to growth albeit via sharper drop in imports than exports. We still expect growth to be somewhat lower in 2019 compared to 2018 as some external tailwinds have lost their gust. The French economy grew 0.3%, at roughly the same pace as in 2018Q4. The expenditure breakdown showed that growth mainly came from household consumption and an increase in the build-up of inventories. Net foreign trade proved to be a drag on economic growth in the first quarter with a negative contribution of 0.3%-point. A GDP estimate for Germany, Eurozone’s largest economy, has not yet been released, but we can deduct from the data released so far that growth probably exceeded 0.5%. However, that largely reflects some payback for weak consumption in the previous two quarters. However this would support our claim that the German economy is healthier than it looks. In Y-o-Y terms growth figures are likely to remain depressed due to the absence of positive statistical carry-over effects, while strong growth in domestic spending is expected to have pushed down the contribution of net exports.

Overall, we expect the Eurozone to grow by 1.3% Y-o-Y in 2019 with domestic demand being the driving force.


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