Euro area national accounts for 3Q show that: 1) the recovery continues, but at a very slow pace (with no sign of a significant acceleration, at least for now); 2) the cyclical divergence between core and peripheral countries is narrowing…..
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Recovery confirmed in the euro area, after a year and a half of recession. However, following the spring surge (+0.3% q/q), activity expanded at a slower pace in the summer quarter (+0.1% q/q).
The reading was in line with expectations. Year-on-year growth improved slightly, to -0.4% from -0.6% (revised downwards by one tenth).
In essence, the slowdown in euro area GDP growth compared to the previous reading was due to the recovery’s loss of steam in the area’s two main countries. In Germany, GDP grew by 0.3% q/q, down from +0.7% q/q the previous quarter. The slowdown seems to have been due to weather conditions and calendar effects that had “inflated” the spring reading. According to the German federal statistics bureau, growth was driven exclusively by domestic demand; specifically, corporate investments and the construction sector marked an expansion, accompanied by a slight increase in spending (both private and public), whereas foreign trade made a negative contribution. This means that Germany is now providing some traction, albeit very modest, to the euro area economy. The only surprise came from France, where GDP growth slowed unexpectedly by -0.1% q/q from a previous rate of +0.5% q/q. The decline was due to a contraction in investments and to the negative contribution of foreign trade, while inventories grew. Vice versa, spending increased, albeit modestly (0.2% q/q), in both the private and public sectors.
By contrast, Italy and Spain showed some improvement. In Italy, GDP growth stayed in negative territory for the ninth consecutive quarter (marking the longest recession since quarterly data began to be surveyed), but only by -0.1% q/q (vs. -0.3% q/q in the spring quarter); Istat has informed that while value added decreased in agriculture and services, it increased in the industrial sector; therefore, as we had forecast, return to (modest) quarterly growth is postponed to Q4. Spain, on its part, is already back in positive growth territory, albeit by just one tenth in 3Q 2013 (after nine consecutive months on the decline). In this case as well, data broken down by components are not yet available, although expectations are for a slight increase in private consumption as opposed to a further contraction in investments; unlike the situation in Germany and France, the recovery in Spain is being driven by net exports. Among the other peripheral countries, Portugal has also resumed growing (for the second consecutive quarter, to 0.2% from 1.1% q/q the previous quarter), whereas Greece has only made year-onyear data available (and marked an “improvement” to -3% from -3.7% y/y), which seems compatible with a further contraction in GDP. Moderate growth was recorded in Belgium and Holland (0.3% and 0.1% q/q respectively).
In essence, quarterly data show that: 1) the recovery continues, but at a very slow pace; 2) the cyclical divergence between core and peripheral countries is narrowing; more in detail, peripherals (Spain and Portugal, in particular), seem to be benefiting from the effects on imports of internal devaluation (part of the rebalancing process within the euro area).
Going forward, the recovery is expected to continue this quarter, in which, based on our estimates, GDP growth could reaccelerate, albeit only marginally, at a pace of two or three tenths, after having just avoided stagnating over the summer. In essence, after exiting the recession, the euro area is growing at a cruising speed of around 0.2% q/q, and for the time being there is no indication of a significant further acceleration. The levels of both the EU Commission’s forwardlooking index and of the composite PMI in October are consistent with a confirmation of such speed in 2013Q4 and 2014Q1, with year-on-year growth returning into significantly positive territory, at around 1%. The fact that forward-looking indices are already compatible today with the average annual GDP rate we are forecasting for 2014 (1%) means that we do not expect quarterly growth to accelerate significantly in the course of next year (+0.3% q/q in 2014 in our estimation, vs. an average rate of 0.2% q/q in the last three quarters of 2013). In brief: 1) on the one hand, we think the worsening of some confidence surveys (PMI, IFO, BNB) in October does not mark a trend reversal, but rather only a “physiological” hiatus in the recovery trend recorded since the spring months; 2) on the other, the recovery remains very modest, and not exempt from risks, including the appreciation of the exchange rate (which may have a relevant impact on exports, considering the slow growth of global demand): according to our estimates, an appreciation of the euro’s effective exchange rate of over 6%, as observed in the past year, would have a negative impact on GDP of -0.3% after one year, if permanent.
Appendix
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