RaboResearch - Economic Research

Eurozone: A gradual slowdown, mounting challenges

Economic Comment

  • Flash estimate Q4 GDP Eurozone: 0.2%
  • Sentiment indicators point towards subdued growth rates in coming quarters
  • France (0.3%) and Spain (0.7%) performed better than expected in Q4
  • Italy entered a technical recession, with two quarters of negative growth (-0.1%, -0.2%)

Slow and steady?

GDP growth in Q4 for the Eurozone as a whole showed a moderate growth rate of 0.2% q-o-q. This confirms the stream of disappointing data that we have seen in recent months. Last week’s PMIs already raised concerns about the persistence of the slowdown and indicated that a swift recovery is not to be expected. The Eurozone composite PMI dropped to 50.7 in January, its lowest level since August 2013. More negative news came from the (highly volatile) retail sales in Germany, released this morning, which dropped by 4.3% MoM in December, despite (still) elevated levels of consumer confidence.

Overall the decomposition of the GDP growth figures of individual countries points towards a slowdown in domestic demand, but with a (surprisingly) positive contribution from net exports. This could be hard to match in coming quarters considering the external headwinds facing the Eurozone.

As we wrote in our publication two weeks ago we revised our growth forecast for the eurozone downwards, but noted that from a medium-term point of view the outlook is still quite positive, although it will be hard to return to the growth figures seen in 2017 and 2018.

Figure 1: Going low(er)
Figure 1: Going low(er)Source: Macrobond
Figure 2: Net exports were the biggest drag on Eurozone economic growth in Q3
Figure 2: Net exports were the biggest drag on Eurozone economic growth in Q3Source: Macrobond, Rabobank

Looking back to Q3 a large part of the slowdown in that quarter was driven by a negative contribution from net exports (figure 2). This can be explained by weaker export growth to for example China and Turkey. The contribution of net exports seems to have recovered a bit in Q4, but with the trade war weighing on sentiment this might not be very sustainable. GDP details from France and Spain indicated that investment spending was significantly weaker in Q4, which may have both external and internal causes. Several idiosyncratic factors have resulted in the recent subdued growth rates of domestic demand. These factors are for example the introduction of revised car emission standards in Germany, negative impact of the yellow vest protests in France and higher borrowing costs in Italy caused by elevated sovereign yields. To sum up, even though the official decomposition for Q4 has not been released, it will likely reflect weakness in both forein and domestic demand.

Italy enters recession, France and Spain perform better than expected

Figure 3: Italy entered a technical recession, Germany will probably avoid it
Figure 3: Italy entered a technical recession, Germany will probably avoid itSource: Macrobond, Rabobank

Together with the release of the aggregate Eurozone figure for Q4, several countries released their estimates for GDP growth in Q4. The economy in France grew with 0.3% in the third quarter, which is significantly better than we expected. Still the outlook might not be very positive since household consumption slowed from 0.4% to 0.0%, reflecting the yellow vest protests. The quarterly figure was boosted by a positive contribution of net trade, in which the delivery of cruise ship Celebrity Edge was a positive one-off factor. Italy officially entered a technical recession with two consecutive quarters of negative economic growth. The growth rate in Q4 was estimated to be -0.2%, which was even worse than Q3. There was a negative contribution by domestic demand, but a positive contribution from net exports. Spain again proved to be the positive outlier and noted a GDP growth of 0.7% in the fourth quarter. Germany has not released a growth figure for Q4, but the already known estimate for the annual growth indicates that it was a small plus.

Mounting challenges

We still have some sympathy for the view that underlying forward looking indicators, such as low borrowing costs, rising (real) wages, robust money supply growth and – yes – an upward sloping yield curve, are not consistent with the view that the Eurozone is slipping into a recession. And a ‘glass half-full’ kind of person would argue that “we still had growth” in the last quarter of 2018 and that some of the weakness in that quarter was probably of a transitory nature. But the protracted slowdown is adding to the challenges policy makers are facing.

In the face of ongoing uncertainty over Brexit, the US-China trade war and concerns over China’s ability to kick-start growth, a key risk is that the protracted slowdown becomes self-sustaining, with companies holding back investment and the labour market taking a hit at some point as well.

Worse, though, is the increasing divergence between member states. Notably the ongoing weakness in Italy is a cause for concern. Nationalist politicians may blame the weakness on the EU. Although the call for budgetary support is rising in Germany too, it remains to be seen whether a quick boost to demand can be administered at the right time. So, it’s not inconceivable that pressure on monetary policy makers to act will rise if the data remain weak.

The ECB’s latest staff projections, released in December, had pencilled in a 0.4% QoQ gain in Q4 GDP (with 0.2% being at the low end of their probability range), so a downward revision to its growth projections is very likely. In its January policy meeting, the ECB shifted its economic assessment to “downside risks”, paving the way for a potential response should the economic situation fail to improve in the coming months. But we believe that its room for manoeuvre is rather limited. We feel that the most likely response in the near-term is the announcement of a new series of long-term refinancing operations, so as to ensure that the availability of credit does not stand in the way of a rebound in growth as soon as sentiment improves.

Koen Verbruggen
RaboResearch Global Economics & Markets Rabobank KEO
+31 88 726 7864
Elwin de Groot
RaboResearch Global Economics & Markets Rabobank KEO
+31 6 1389 2916

naar boven