Eurozone GDP growth again limited to 0.3% q/q in Q4 2015 by poor net trade performance

A second estimate from Eurostat confirmed that Eurozone GDP growth remained limited to 0.3% quarter on quarter (q/q) in the fourth quarter of 2015. Growth had previously moderated to 0.3% q/q in the third quarter from 0.4% q/q in the second quarter and a peak growth rate of 0.6% q/q (revised up from 0.5% q/q) in the first quarter (the best performance since the first quarter of 2011). Eurozone GDP growth had earlier picked up to 0.6% q/q in the first quarter of 2015 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 an upwardly revised 1.6% in the fourth quarter of 2015, which matched the year-on-year (y/y) increases achieved in both the third and second quarters. These are the best annual growth rates since the second quarter of 2011. Annual growth had climbed to the peak rate of 1.6% from 1.3% in the first quarter of 2015, 0.9% in the fourth quarter of 2014, and 0.7% in both the third and second quarters of 2014.

Eurozone GDP growth over 2015 was revised up to 1.6% from the preliminary estimate of 1.5%. This was up from 0.9% in 2014 and was the best performance since 2011. There had been GDP contractions of 0.4% in 2013 and 0.7% in 2012.

Modest growth in Germany and France; barely any in Italy

Fourth-quarter Eurozone GDP growth was limited by lacklustre German GDP growth of 0.3% q/q, which matched the third-quarter performance. German domestic demand was decent in the fourth quarter but net trade was negative as exports fell and imports rose.

French GDP growth was also unchanged at 0.3% q/q in the fourth quarter, although underlying GDP growth was likely slightly stronger in the fourth quarter compared to the third as it was modestly affected by the November terrorist attacks).

Particularly disappointingly, Italian GDP barely grew in the fourth quarter as GDP edged up just 0.1% q/q – although it was held back by markedly negative stocks (which knocked 0.4 percentage point off growth). This continued a disappointing slippage in Italian growth through 2015, as q/q GDP expansion came down from 0.2% in the third quarter, 0.3% in the second quarter and 0.4% in the first.

On a more positive note, Spanish GDP growth held up well at 0.8% q/q in the fourth quarter, having edged back to this level in the third quarter from a peak growth rate of 1.0% q/q in the second quarter.

Among other Eurozone countries, there were modest pick-ups in q/q GDP growth in the fourth quarter in the Netherlands (to 0.3% from 0.1%), Belgium (to 0.3% from 0.2%), Austria (to 0.2% from 0.0%), and Portugal (to 0.2% from 0.1%).

Elsewhere, there was robust fourth-quarter expansion in Slovakia (up 1.0% q/q) and Estonia (up 1.2% q/q), while there was also growth in Slovenia (0.6% q/q), Lithuania (0.5% q/q), and Cyprus (0.4% q/q).

Meanwhile, Greece and Finland both eked out marginal growth of 0.1% q/q in the fourth quarter, thereby just avoiding renewed recession after GDP contracted in the third quarter (by 1.2% q/q in Greece amid capital controls and austerity measures, and by 0.2% q/q in Finland)

Domestic demand entirely responsible for Eurozone GDP growth in Q4

Net trade was a significant drag on Eurozone GDP growth in the fourth quarter of 2014, knocking 0.3 percentage point off q/q growth. This followed a negative contribution of 0.4 percentage point in the third quarter.

Specifically, Eurozone exports of goods and services could only edge up 0.2% q/q in the fourth quarter, which matched the lacklustre third-quarter performance. Export growth slowed to 3.6% y/y in the fourth quarter from 4.6% y/y in the third quarter and 6.0% y/y in the second quarter. This suggests that the help to Eurozone exports coming from a competitive euro was countered by muted global growth. Meanwhile, Eurozone imports of goods and services were up 0.9% q/q and 5.3% y/y in the fourth quarter after expansion of 1.2% q/q in the third quarter; this ties in with reasonable Eurozone domestic demand in the fourth quarter.

Eurozone domestic demand growth held up relatively well in the fourth quarter as it expanded 0.6% q/q following expansion of 0.7% q/q in the third quarter. Higher inventories contributed 0.1 percentage point to q/q growth in the fourth quarter after a positive contribution of 0.3 percentage point in the third quarter.

The best news saw a welcome pick-up in total investment across the Eurozone in the fourth quarter, as it rose 1.3% q/q and 3.4% y/y. This was up from growth of 0.4% q/q in the third quarter and 0.1% q/q in the second quarter, and was broadly in line with the 1.4% q/q increase seen in the first quarter. Overall business confidence across the Eurozone reached its highest level for over four years in the fourth quarter, while some easing in credit conditions and very low interest rates were supportive to investment.

Additionally, public spending growth picked up to 0.6% q/q in the fourth quarter from 0.3% q/q in both the third and second quarters, as it was clearly lifted in some countries (notably Germany) by spending on refugees. This caused public spending to be up 1.6% y/y in the fourth quarter.

However, consumer spending eased back in the fourth quarter as it grew 0.2% q/q and 1.5% y/y. This followed 0.5% q/q growth in the third quarter. The fundamentals were still largely decent for consumers in the fourth quarter despite the moderation in growth. Household purchasing power continued to be supported by deflation/very low inflation across the Eurozone in the fourth quarter. Also helpful to consumer spending, the number of Eurozone unemployed fell by a decent 306,000 in the fourth quarter, although this was less than the record 564,000 drop seen in the third quarter.

Eurozone growth outlook

IHS recently trimmed its Eurozone GDP growth projection for 2016 to 1.6% from 1.7%, and there is clearly a very real possibility that we will have to take it down further. There are appreciable downside risks to the Eurozone growth outlook coming from global growth problems and recent financial market volatility (which is being reinforced in the Eurozone by increased concerns over the strength of the banking sector). Muted global growth not only hits Eurozone exports but also risks having an appreciable negative impact on Eurozone business sentiment along with major financial market turmoil, which leads to a scaling back of investment and employment plans. Indeed, the European Commission reported that overall Eurozone business and consumer confidence dipped appreciably for a second successive month in February to be at a 14-month low.

A vote for the UK to leave the EU in the referendum on 23 June would also likely have negative repercussions for Eurozone growth through reinforcing economic and political uncertainties.

Nevertheless, the domestic fundamentals still look broadly supportive to Eurozone economic activity. In particular, appreciable support to Eurozone growth is coming from very low oil and commodity prices, a competitive euro and ECB stimulus (that looks certain to be extended in March). The influx of refugees should also provide overall help to Eurozone growth in 2016, primarily through increased public expenditure. There are also more growth-oriented fiscal policies in some countries.

Consumers perhaps offer the Eurozone the best hope for growth at the moment – the fundamentals still look reasonable for consumer spending in the Eurozone with deflation/negligible inflation boosting purchasing power and labour markets are generally improved. Specifically, Eurozone consumer prices were down 0.2% y/y in February and are likely to stay muted for some considerable time to come. Meanwhile, Eurozone unemployment has fallen 2.665 million overall from its April 2013 peak of 19.312 million to stand at 16.647 million in January, which was the lowest level since October 2011. This has caused the Eurozone unemployment rate to come down to 10.3% from 12.1%.

Of course, there is the very real possibility that consumers will be more cautious in their spending in the near-term given that consumer confidence across the Eurozone softened to a 14-month low in February according to the latest European Commission survey. Nevertheless, confidence in February was still clearly above its long-term average level. Furthermore, consumers still see it is as a pretty good time to make major purchases. Although consumers' perception of whether it is a good time to make major purchases at present softened in February, it was still not that far below the near 15-year high seen in January. Meanwhile, their perception for major purchases for the next 12 months was only slightly below the eight-year high in December

On the investment front, there should be an increasing need to upgrade and replace old capacity across the Eurozone, given that many companies have delayed doing so for an extended period. Furthermore, credit conditions have eased overall. However, a recent marked easing back in business confidence across the Eurozone may lead to some reining in of investment pans in the near term at least. Furthermore, there will likely be little need in most countries to invest to add capacity for some time to come.

We expect Eurozone GDP growth to improve to 1.8% in 2017, helped by an improved global economic environment and still decent domestic economic fundamentals.

ECB implications

Relatively resilient Eurozone domestic demand in the fourth quarter of 2015 is unlikely to deter the ECB from delivering more stimulus at its 10 March policy meeting, especially as latest survey evidence suggests stuttering Eurozone economic activity in the first quarter of 2016, although there was renewed Eurozone deflation of 0.2% in February.

IHS expects the ECB to trim its deposit rate by a further 10 basis points to -0.40% at its 10 March meeting. It is very possible that the ECB will introduce a double tier on its deposit rate in order to ease the pressure on banks' profitability from another cut. The higher negative rate would only be charged on banks' deposits with the ECB above a certain level. We also believe the ECB is likely to step up its monthly purchase of assets (perhaps by EUR20–30 billion from the current level of EUR60 billion).