It could have been worse. With GDP growth of 0.2% q/q in Q3, the Euro-area economy grew a bit more than expected in a difficult environment. Looking ahead, a recession is unlikely, but so is a significant uptick in Q4. Slow growth lies ahead and the pressure on the ECB to act will remain high.
Information on the composition of Euro-area GDP growth is not yet available, but country data point towards private and public consumption as well as net exports as the drivers. Capital spending almost certainly dropped again. The outcome for Q3 is in line with our growth forecast for the full year 2014 (0.8%). With the better-then-expected numbers today, there is no need for a big downward adjustment of next year’s forecast (currently 1.1%).
Germany avoided recession (0.1% q/q in Q3) …
… and Q2 results have been revised up to just -0.1% q/q (from -0.2%). In Q3, private consumption and net exports contributed to growth, while investment into machines and equipment and also construction investment fell again. The fall in construction investment might surprise given ultra-low interest rates. However, housing construction is not expanding fast and business construction investment is falling in line with capital spending. The numbers are in line with our growth forecast of 1.6% for this year. As no significant acceleration is in sight for Q4, we will take our forecast for next year (1.5%) down a bit as the carry-over from this year into next will be very low.
In France, the growth number (0.3% q/q) was better than the growth mix. Government spending and inventories pushed GDP up, and both cannot be sustainable. Capital spending decreased for the fourth quarter in a row. Private consumption increased although employment fell. Italy and Cyprus were the only euro-area countries were GDP declined over the quarter.
Euro area still not out of the doldrums
That 0.2% of GDP growth (actually 0.16%) qualifies for a positive surprise says a lot about the Euro area. The economy suffers – among many other things – from a lack of demand. Fiscal policy is unlikely to step in and the private sector is busy repairing balance sheets. What remains is an ECB that
- has done a lot by it’s own standards, not when compared internationally
- still has a lot of unconventional ammunition left
- has a mandate to bring inflation back close to 2% from currently 0.4%.
A lot points towards more ECB stimulus as we argued here in more detail. The aim is to inspire confidence, bring rates down where this is still possible, contribute to a weaker euro and ultimately create expectations of increasing inflation and growth. Those who argue that the ECB should be aware of unintended side-effect and that it cannot cure all the Euro-area’s problems are completely right. But the ECB has to weigh the risks of trying it out against letting things run their way. As we read the ECB, there is a growing willingness to increase the stimulus over time.
Nordea