Data on 3Q GDP growth in the euro area was slightly stronger than expected. The favourable surprise was largely due to stronger than forecast figure in France. In Germany, growth remained lacklustre, and there are prospects for a further slowdown. Contraction in Italy confirmed…..
Intesa Sanpaolo – Research Department – For professional investors and advisers only
Euro area growth in 2014 will close at a mere 0.8%. The critical question is whether or not a significant reacceleration will come in 2015.
Euro area GDP surprised marginally on the upside in 3Q 2014, coming in at 0.2% q/q as opposed to a forecast of 0.1% q/q.
After a string of negative, France was one of the countries which surprised on the upside, showing significant, stronger-than-forecast growth (0.3% q/q). Consumer spending should continue to support 4Q performance. However, other elements, in addition to the downward revision of 2Q forecasts, prevent us from considering this as the signal of an acceleration of the French economy. First of all, a positive contributions will be hard to be confirmed from two items in particular: inventories (+0.3%), and public spending (which grew at its fastest pace since 2009). On the other hand, import growth should be slower at the end of the year, largely offsetting the inventory contribution. Monthly surveys for October are mixed: some point to a slight improvement compared to the average for 3Q (manufacturing PMI), others to a stable trend (Insee), and others still to a worsening (services PMI); on the whole, surveys still seem consistent with a stagnation of economic activity, rather than with an acceleration.
Germany moved in line with expectations, showing a +0.1% q/q rebound, from -0.1% q/q in 2Q. Growth was driven by consumption and, to a lesser degree, by net exports, whereas investments in machinery and equipment, as well as construction investments, kept contracting; a negative contribution also came from inventories. Also as a result of the likely drag represented by warehouse stocks, we expect an acceleration in the quarters at the turn of the year, albeit modest (around 0.2% q/q), given the downtrend of confidence indices (IFO first among them).
A case in itself is Italy, the only major euro area economy still experiencing a recession: GDP dropped (as forecast) by -0.1% q/q, from -0.2% q/q in the spring. The economy has been failing to show positive growth for an impressive 13 quarters, and GDP has hit its lowest level in 14 and a half years. We expect final domestic demand to have made a negative contribution, tied in particular to investments, whereas modest consumer spending growth may have continued (+0.1% q/q on average in the past year). On the other hand, net exports and inventories (which had subtracted a hefty three tenths from growth in the spring) are expected to have made a positive contribution. We suspect that the recession may continue in the closing months of the year (forecast: -0.2% q/q). As a result, growth in 2014 may level off at -0.3/-0.4%. Also, forward-looking indicators are still not consistent with an exit from recession, a factor which leaves a serious question mark hanging over a return to positive growth as soon as early 2015. The cyclical recovery expected next year is increasingly likely to prove modest (+0.3/0.4%). The only countries which failed to achieve positive growth, in addition to Italy, were Cyprus (-0.4% q/q) and Austria (zero). Belgium, Holland, Finland, and Portugal, all performed in line with the euro area average (0.2% q/q). The recovery in Greece was confirmed.
In essence, our view is that data is failing to show a significant improvement of the economic situation. The only countries experiencing positive growth are those benefiting from competitive devaluation deriving from years of austerity (Spain and Greece) – the sustainability of which in the medium term, in any case, depends on the resilience of demand in the rest of the euro area. Also, monthly surveys signal that stagnation may extend not only into the closing months of 2014, but also to the first part of 2015 (in which growth would average for the whole year an only marginally higher rate than the 0.8% recorded in 2014). Given this situation, support from economic policies is still necessary.
Source: BONDWorld.ch
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