Q2 GDP came in as expected – stagnation. July inflation confirmed at 0.4% y/y. 10-year Bund yield dipped below 1%
Like everyone else, the ECB will have to take its growth projection down for this and probably also for next year. With stagnation in Q2 (after 0.2% q/q in Q1), quarterly GDP increases of 0.5% would be necessary in both Q3 and Q4 to reach the ECB mid-projection of 1% for 2014. Much lower – but positive rates – are likely, bringing the ECB projection to something like 0.8%. Slightly more growth can reasonably be expected for next year as a consequence of less tight fiscal policy, a supportive global environment and the further weakening of the euro that we expect.
On a country level, Germany posted a decline by 0.2%, partly driven by a temporary dip in construcion investment. A reversal will help in Q3. That said, forward looking indicators for manufacturing don’t look promising right now. Stagnation in France could be no surprise.
Things look better in the Netherlands and also in Spain, where GDP rose by 1% in the first half of this year. Spain’s rise is good for Spain but the country’s weight in Euro-area GDP (11%) is of course much too small to mean much for the region as a whole. For the three larger countries representing two thirds of Euro-area GDP, the outlook is very different:
- After a weaker spot, Germany will find back to healthy growth driven by domestic demand. Germany doesn’t need the low interest rates the ECB provides but will continue to benefit.
- Growth in both France and Italy is unlikely to accelerate much. Restrictive fiscal policy plays a role, but both countries suffer most of all from structural deficiencies the ECB cannot cure.
Bottomline: No growth in Q2, slow growth ahead. Support from ECB needed for a long time.
Preliminary country data, % q/q:
- Germany: -0.2%, driven by lower construction investment and exports rising slower than imports; both pirvate and public investment grew
- France: 0%, second flat quarter for GDP in a row; private consumption rose again while capex spending fell markedly once more
- Italy: -0.2%, probably general weakness, detailed data are not yet out
- Spain: 0.6%, rising from the ashes, but still a long way to go
- Netherlands: 0.5% q/q driven by exports after a weak first quarter, which has however been revised upwards from -1.4% q/q initially to “only” -0.4% lately
- Portugal: 0.6%, after -0.6% in Q1
- Belgium, Finland: 0.1%
- Austria: 0.2% q/q
Nordea