Eurozone GDP data on the second quarter of the year confirmed that the region’s longest recession (six quarters) to date is finally over.
GDP grew by a more-than-expected 0.3 per cent quarter-on-quarter (consensus 0.2 per cent), the strongest quarterly expansion since Q1 2011. Confirmation that the eurozone’s second recession since 2008 is finally over is welcome, but the Q2 expansion needs to be kept in perspective. It still leaves the level of eurozone GDP three per cent below pre-crisis levels.
The growth was primarily driven by Germany (0.7 per cent q-o-q) and the unexpectedly broad-based growth in France (0.5 per cent).
The expansion is expected to continue in the second half and, in Q3 at least, and the divergence should narrow, with the core slowing but the periphery expected to show further signs of stabilisation.
However, there were also signs of less marked contractions in the periphery, with Italy contracting by ‘just’ 0.2 per cent q-o-q and Spain by a mere 0.1 per cent q-o-q in Q2.
Data for much of the periphery are not yet available, except for Portugal, which expanded by a remarkable 1.1 per cent q-o-q after 10 quarters of contraction, and Cyprus, which fell a further 1.4 per cent q-o-q.
Confirmation that the eurozone’s second recession since 2008 is finally over is welcome, but the Q2 expansion needs to be kept in perspective. It still leaves the level of eurozone GDP three per cent below pre-crisis levels
Full details will not be available until September 4 but consumer and government spending are likely to have grown.
Net exports should also have made a small positive contribution as exports are estimated to have slightly outpaced imports.
Investment is expected to have remained the key area of weakness with only German construction likely to have shown any significant expansion in the quarter after a very bad Q1, when construction was hit by very disruptive weather.
The good news is that the expansion is set to continue in the second half of this year, and, in Q3 at least, intra-EU divergence should narrow.
German growth is set to slow a little (to quarterly growth rates of between 0.3 per cent and 0.4 per cent on our existing forecasts) as the industrial expansion continues but the weather-related construction rebound of Q2 fades.
French growth is expected to moderate from the unexpectedly large 0.5 per cent q-o-q rebound in Q2 as energy consumption was boosted by cold weather in Q2 and the negative impact of tax increases is set to increase again in the second half.
On the other hand, the peripheral European countries should show further signs of stabilisation. Growth in Italy is expected to turn slightly positive in the second half.
The risks to the full-year 2013 forecast of -0.6 per cent are now tilted slightly to the upside.
No explicit revisions will be made to the forecasts until the full details of the Q2 GDP data are published.
At this stage the potential upside risks to eurozone growth in 2013-2014 are not considered to be of a magnitude that will significantly alter the medium-term structural view that government debt burdens in many EU member states will continue to grow, and eurozone inflation will remain under downward pressure.
The Q2 GDP data are likely to increase the European Central Bank’s confidence that the second-half recovery is materialising, meaning it is unlikely to use any of its remaining ammunition over the next few months. Nevertheless it is expected that the ECB will keep the door open to further easing if required.
Depending on how markets react to the prospect of Fed tapering later this year, an ECB rate cut could still be an effective way of convincing the markets that the ECB will not be following the Fed to the exit any time soon, should its verbal forward guidance not suffice.
This analysis was prepared by HSBC Global Research.