A look at major eurozone economies
Marketing department of HSBC Bank Malta plc
Germany
The German economy started this year with an unexpectedly strong growth spurt in quarter 1 of 2008, going up by 1.5 % quarter-on-quarter on a seasonally and working day-adjusted basis, the strongest thrust since quarter 2 of 1996. Changes in inventory made the greatest contribution to growth, going up by 0.7 percentage points. This was followed by construction spending with 0.4 percentage points benefiting from the mild winter and machinery and equipment spending with 0.3 percentage points. Private consumption contributed 0.2 percentage points.
Machinery and equipment spending grew by 4 per cent quarter-on-quarter in quarter 1. The investment cycle should have peaked, though. However, as replacement investments remain on the agenda, no trend towards negative quarterly changes should set in. Taken together the growth contribution of stock building and net exports together have made a positive growth contribution in every quarter for more than two years. It is expected that this trend will continue. Analysts do not anticipate that changes in inventory will generate lastingly negative growth impetus. In addition, economic growth is being increasingly driven by domestic demand despite the distorting effects of the increase in VAT in 2007.
The high oil and food prices should put only a temporary damper on consumer demand. Given a further increase in employment, private consumption is likely to become a mainstay of growth. The dampened economic activity in mid-2008 with an expected moderate decline in GDP quarter-on-quarter in quarter 2, 2008, should only indicate the return to normal growth momentum and not reflect the starting point for the economy to drift down into a phase of stagnation.
France
As was expected, GDP growth slowed less markedly in France than in the eurozone. At an annual pace, it rose to 2.2 per cent year-on-year in the first quarter of 2008, whereas it was 1.1 percentage points lower in the first quarter of 2007. Automobile production is no longer weighing on industrial output performing with a similar growth pace as in the eurozone in the first quarter of 2008. This renewed robustness recorded by the automobile industry also boosted exports. All in all, external trade made a positive contribution of 0.3 percentage point.
Residential investment further decelerated and was stable in the first quarter. Household consumption was far weaker than expected because of the -5 per cent quarter-on-quarter slump in energy consumption. Household consumption will likely rebound, driven by growth in gross disposable income due to tax cuts and the monetisation of overtime. However, this upturn should be muted because inflation is weighing on real disposable income and household sentiment.
Moreover, households are starting to fear a rise in the unemployment rate, and this will encourage them to save more and spend less. Residential investment is expected to continue slowing down. New housing inventories have climbed to a historically high level and building starts dropped 10.3 per cent year-on-year in the first quarter of this year. Prices started to decline, falling 1 per cent quarter-on-quarter, in the first quarter of this year. Exports as well as corporate investment will be less robust due to the deterioration in the outlook for activity in the eurozone as well as the US and UK.
The fiscal deficit will deteriorate and climb to 2.9 per cent even though the inflation surprise is curbing its growth as a percentage of GDP. The cuts in taxes and welfare contributions are weighing on budget revenue while growth is slowing.
Italy
After contracting in the final quarter of 2007, GDP growth in Italy rebounded in quarter 1 to 0.5 per cent quarter-on-quarter, driven largely by exports. Consumption staged only a meagre recovery, and the outlook remains weak. Since becoming prime minister again in April, Silvio Berlusconi quickly followed up on his election promises by cutting taxes. In a similar vein to measures implemented by Nicolas Sarkozy soon after becoming French President, Mr Berlusconi is attempting to boost disposable income through reducing tax on overtime payments and eliminating local housing tax.
However, the fundamentals are deteriorating. Inflation rose to 4 per cent in June and is set to head higher, which will continue to squeeze real wages, and the unemployment rate showed a surprisingly large rise to 6.5 per cent in the first quarter of 2008 (up from 6.2 per cent in fourth quarter of last year), with construction and manufacturing particularly weak. Consumer confidence has also taken another leg down after the post-election bounce in May. With growth in Italy's major export destination - Germany - now showing signs of slowing, the export sector is also set to weaken and we expect GDP growth of less than 0.5 per cent in both 2008 and 2009.
At the same time as cutting personal taxes, the government is increasing tax on profits earned by energy companies and is also seeking to target higher taxes on banks and insurance companies. However, the slowdown in GDP growth implies that these increases will not prevent a marked deterioration in the budget balance. Having narrowed to less than 2 per cent of GDP in 2007, we expect the deficit to widen towards 3 per cent by 2009.
• This report was compiled by the marketing department of HSBC Bank Malta plc on the basis of economic research and financial information produced by HSBC International Bank.
The German economy started this year with an unexpectedly strong growth spurt in quarter 1 of 2008, going up by 1.5 % quarter-on-quarter on a seasonally and working day-adjusted basis, the strongest thrust since quarter 2 of 1996. Changes in inventory made the greatest contribution to growth, going up by 0.7 percentage points. This was followed by construction spending with 0.4 percentage points benefiting from the mild winter and machinery and equipment spending with 0.3 percentage points. Private consumption contributed 0.2 percentage points.
Machinery and equipment spending grew by 4 per cent quarter-on-quarter in quarter 1. The investment cycle should have peaked, though. However, as replacement investments remain on the agenda, no trend towards negative quarterly changes should set in. Taken together the growth contribution of stock building and net exports together have made a positive growth contribution in every quarter for more than two years. It is expected that this trend will continue. Analysts do not anticipate that changes in inventory will generate lastingly negative growth impetus. In addition, economic growth is being increasingly driven by domestic demand despite the distorting effects of the increase in VAT in 2007.
The high oil and food prices should put only a temporary damper on consumer demand. Given a further increase in employment, private consumption is likely to become a mainstay of growth. The dampened economic activity in mid-2008 with an expected moderate decline in GDP quarter-on-quarter in quarter 2, 2008, should only indicate the return to normal growth momentum and not reflect the starting point for the economy to drift down into a phase of stagnation.
France
As was expected, GDP growth slowed less markedly in France than in the eurozone. At an annual pace, it rose to 2.2 per cent year-on-year in the first quarter of 2008, whereas it was 1.1 percentage points lower in the first quarter of 2007. Automobile production is no longer weighing on industrial output performing with a similar growth pace as in the eurozone in the first quarter of 2008. This renewed robustness recorded by the automobile industry also boosted exports. All in all, external trade made a positive contribution of 0.3 percentage point.
Residential investment further decelerated and was stable in the first quarter. Household consumption was far weaker than expected because of the -5 per cent quarter-on-quarter slump in energy consumption. Household consumption will likely rebound, driven by growth in gross disposable income due to tax cuts and the monetisation of overtime. However, this upturn should be muted because inflation is weighing on real disposable income and household sentiment.
Moreover, households are starting to fear a rise in the unemployment rate, and this will encourage them to save more and spend less. Residential investment is expected to continue slowing down. New housing inventories have climbed to a historically high level and building starts dropped 10.3 per cent year-on-year in the first quarter of this year. Prices started to decline, falling 1 per cent quarter-on-quarter, in the first quarter of this year. Exports as well as corporate investment will be less robust due to the deterioration in the outlook for activity in the eurozone as well as the US and UK.
The fiscal deficit will deteriorate and climb to 2.9 per cent even though the inflation surprise is curbing its growth as a percentage of GDP. The cuts in taxes and welfare contributions are weighing on budget revenue while growth is slowing.
Italy
After contracting in the final quarter of 2007, GDP growth in Italy rebounded in quarter 1 to 0.5 per cent quarter-on-quarter, driven largely by exports. Consumption staged only a meagre recovery, and the outlook remains weak. Since becoming prime minister again in April, Silvio Berlusconi quickly followed up on his election promises by cutting taxes. In a similar vein to measures implemented by Nicolas Sarkozy soon after becoming French President, Mr Berlusconi is attempting to boost disposable income through reducing tax on overtime payments and eliminating local housing tax.
However, the fundamentals are deteriorating. Inflation rose to 4 per cent in June and is set to head higher, which will continue to squeeze real wages, and the unemployment rate showed a surprisingly large rise to 6.5 per cent in the first quarter of 2008 (up from 6.2 per cent in fourth quarter of last year), with construction and manufacturing particularly weak. Consumer confidence has also taken another leg down after the post-election bounce in May. With growth in Italy's major export destination - Germany - now showing signs of slowing, the export sector is also set to weaken and we expect GDP growth of less than 0.5 per cent in both 2008 and 2009.
At the same time as cutting personal taxes, the government is increasing tax on profits earned by energy companies and is also seeking to target higher taxes on banks and insurance companies. However, the slowdown in GDP growth implies that these increases will not prevent a marked deterioration in the budget balance. Having narrowed to less than 2 per cent of GDP in 2007, we expect the deficit to widen towards 3 per cent by 2009.
• This report was compiled by the marketing department of HSBC Bank Malta plc on the basis of economic research and financial information produced by HSBC International Bank.