Eurozone GDP growth dips to 0.3% q/q in Q3, hampered by negative net trade

A second estimate from Eurostat confirmed that Eurozone GDP growth dipped further to 0.3% quarter on quarter (q/q) in the third quarter of 2015, after moderating to 0.4% q/q in the second quarter from a peak growth rate of 0.5% q/q in the first quarter (the best performance since the first quarter of 2011). Eurozone GDP growth had previously picked up to 0.5% q/q in the first quarter of 2015, rising from 0.4% q/q in the fourth quarter of 2014, 0.3% q/q in the third quarter, and just 0.1% q/q in the second quarter.

Annual Eurozone GDP growth was stable at 1.6% in the third quarter of 2015, which was the best annual growth rate since the second quarter of 2011. It had previously run at 1.6% in the second quarter of 2015, 1.3% in the first quarter, 0.9% in the fourth quarter of 2014, and 0.7% in both the third and second quarters of last year. Overall Eurozone GDP growth was 0.9% in 2014, following contractions of 0.4% in 2013 and 0.7% in 2012.

Modest growth in Germany, France, and Italy

Eurozone GDP growth was limited in the third quarter by German GDP growth easing back to 0.3% q/q after rising to 0.4% q/q in the second quarter from 0.3% q/q in the first. Consequently, German GDP was up 1.7% year on year (y/y) in the third quarter. Italian GDP growth also dipped to 0.2% q/q in the third quarter, down from 0.3% q/q in the second quarter and 0.4% q/q in the first. Italy's y/y GDP growth actually picked up to 0.8% in the third quarter from 0.6% in the second.

French GDP expanded by 0.3% q/q in the third quarter, an improvement after GDP stagnated in the second quarter following 0.7% q/q expansion in the first quarter. French GDP was up 1.2% y/y in the third quarter.

Among the other larger Eurozone economies, Spanish growth eased back to a still very decent 0.8% q/q in the third quarter, following expansion of 1.0% q/q in the second quarter and 0.9% q/q in the first quarter. Even so, annual Spanish growth of 3.4% in the third quarter was a near-eight-year high. Dutch GDP growth was limited to 0.1% q/q in the third quarter, as it had been in the second quarter following expansion of 0.6% q/q in the first. Dutch GDP was up 1.9% y/y in the third quarter.

Elsewhere, there were q/q slowdowns in growth in the third quarter in Belgium (to 0.2% from 0.5%), Austria (0.1% from 0.3% q/q), and Slovenia (0.4% from 0.7%). Additionally, Portuguese GDP was disappointingly only flat q/q in the third quarter after growth of 0.5% q/q in each of the previous two quarters.

Greece, unsurprisingly, experienced renewed contraction in the third quarter as GDP growth declined 0.9% q/q after surprise growth of 0.3% q/q in the second quarter. There was also q/q GDP contraction in the third quarter in Finland (0.5%) and Estonia (0.5%).

Finally, GDP growth in the third quarter was unchanged at an elevated level in Slovakia (0.9%) and was also stable in Cyprus (0.5% q/q) and Lithuania (0.4% q/q). While GDP growth slowed in Latvia, it was nevertheless robust (down to 1.0% from 1.3%).

Negative net trade limits Q3 Eurozone GDP

Net trade was a significant drag on Eurozone GDP growth in the third quarter, making a negative contribution of 0.3 percentage points. This contrasted with a positive contribution of 0.3 percentage points in the second quarter.

Specifically, growth in Eurozone exports of goods and services moderated to just 0.2% q/q in the third quarter, down from 1.6% q/q in the second, which caused y/y expansion to dip to 4.4% from 5.8%. This suggests that assistance to Eurozone exports from the weakened euro was countered by muted global growth. Meanwhile, Eurozone imports of goods and services were up 0.9% q/q and 4.9% y/y in the third quarter, following growth of 0.9% q/q in the second quarter, which ties in with reasonable Eurozone domestic demand in the third quarter.

Eurozone domestic demand strengthens in Q3

Eurozone domestic demand growth actually picked up to 0.6% q/q in the third quarter after moderating to 0.1% q/q in the second quarter from 0.6% q/q in the first quarter. This was helped by a positive contribution of 0.2 percentage points from higher inventories in the third quarter, contrasting with a negative contribution of 0.1 percentage point in the second quarter.

Consumer demand held up relatively well in the third quarter, increasing 0.4% q/q and 1.7% y/y. Indeed, this marked a pickup in consumer spending growth, which had edged back to 0.3% q/q in the second quarter from 0.5% in both the first quarter of 2015 and the fourth quarter of 2014. Household purchasing power continued to be supported by deflation/very low inflation across the Eurozone in the third quarter. Also helpful to consumer spending, the Eurozone's jobless total fell by 436,000 in the third quarter.

Furthermore, public spending growth picked up to 0.6% q/q in the third quarter from 0.3% q/q in the second quarter, clearly lifted in some countries (notably Germany) by spending on refugees. This caused public spending to be up 1.6% y/y in the third quarter.

Disappointingly, though, total investment across the Eurozone was only flat q/q in the third quarter, although this was slightly offset by the second quarter being revised up to growth of 0.1% q/q from a previously reported contraction of 0.5% q/q. This followed gains of 1.5% q/q in the first quarter of 2015 and 0.6% q/q in the fourth quarter of 2014. Consequently, total investment was up 2.2% y/y in the third quarter. Some easing in credit conditions and very low interest rates were supportive to investment in the third quarter, although an uncertain outlook clearly had a dampening impact.

Outlook and implications

IHS believes the Eurozone should be able to achieve pretty steady, if unspectacular, growth over the coming months, barring a major downturn in global growth.

In fact, survey evidence so far suggests that Eurozone GDP growth is on course to move back up to at least 0.4% q/q in the fourth quarter. In particular, Markit's purchasing managers' composite output index for Eurozone manufacturing and services improved to 54.2 in November, up from 53.9 in October and a three-month low of 53.6 in September. The November/October average of 54.1 was up from an average of 53.9 in both the third and second quarter and also comfortably above the 50.0 level that indicates flat activity. Furthermore, the European Commission reported that overall Eurozone business and consumer confidence was stable in November at its highest level since May 2011.

It is notable that, despite the slowdown in Eurozone GDP growth in the third quarter, domestic demand held up reasonably well, led by consumer spending. Oil prices are currently trading at their lowest level since March 2009 and are likely to remain muted for an extended period, as are commodity prices, while the euro is at a level very supportive to Eurozone growth (even though it has firmed from its recent eight-month low of USD1.055 to currently trade around USD1.085). The European Central Bank (ECB) has just added to already very stimulative monetary policy, while fiscal policy is gradually becoming more growth orientated with countries increasingly introducing stimulative measures.

In particular, the fundamentals look relatively decent for consumer spending across the Eurozone with low inflation/deflation across countries boosting purchasing power and labour markets generally improved. Specifically, consumer prices were only up 0.1% y/y across the Eurozone in November while the number of Eurozone jobless in October was at its lowest level since January 2012 (17.240 million). This has brought the unemployment rate down to 10.7% from 12.1%. Muted wage growth, however, remains a constraint to consumer spending in many countries

Meanwhile, on the investment front, there should be an increasing need to upgrade and replace old capacity across the Eurozone, given that many companies have long delayed doing so. Furthermore, credit conditions are easing while overall business confidence across the Eurozone was at its highest level for over four years in October/November according to the European Commission. However, there will likely be little need in most countries to invest to add capacity for some time.

A limited overall boost to Eurozone economic activity should come from the mass immigration that is occurring primarily from the Middle East and North Africa. This is lifting government spending and will have a knock-on effect for consumer spending. It is already evident that German public spending was increased in the third quarter by spending on refugees.

However, the appreciable drag on Eurozone GDP growth in the third quarter coming from net trade highlights that much will depend on the global economic environment. There is undeniably a very real possibility that slowing growth in the emerging markets centred on China not only hits Eurozone exports but also has an appreciable negative impact on Eurozone business sentiment and leads to a scaling back of investment and employment plans.

It also remains to be seen if the terrorist attacks on Paris and heightened alerts in several other countries will have any significant adverse impact on confidence and economic activity. Repeated terrorist incidents could, for example, make companies more wary about investing in the affected Eurozone countries.

Consequently, it is currently hard to see the Eurozone growing by any more than 0.4–0.5% q/q.

On balance, IHS expects the Eurozone to experience GDP growth of 1.5% in 2015. We forecast growth will then pick up to 1.7% in 2016 and 1.8% in 2017.

Meanwhile, the ECB may well point to relatively resilient Eurozone domestic demand in the third quarter as justifying only limited further stimulus at its 3 December policy meeting.