IHS Global Insight Perspective | |
Significance | Eurozone growth picked up markedly to 1.0% quarter-on-quarter (q/q) in the second quarter of 2010. This was the best performance since mid-2006, and was up from upwardly revised growth of 0.3% q/q in the first quarter, and 0.2% q/q in the fourth quarter of 2009. It was also the fourth successive quarter of Eurozone growth following the deep 2008–09 recession. Year-on-year growth accelerated to 1.9% in the second quarter. |
Implications | There was an element of catch-up in the second quarter, after Eurozone growth had been held back in the first quarter by the very bad weather at the start of 2010. Even so, the improvement ran deeper than that, with encouraging improvement in consumer spending and investment. Latest data suggest that Eurozone growth is holding up pretty well in the third quarter, although there are signs of moderation. |
Outlook | The Eurozone recovery still looks likely to be bumpy and gradual overall in the face of serious headwinds, including major fiscal tightening across the region increasingly kicking in, and probable slower global growth and inventory developments becoming less favourable. Eurozone sovereign-debt problems may well also periodically flare up. Consequently, IHS Global Insight currently forecasts Eurozone GDP growth to be 1.4% in 2010 and 1.3% in 2011, according to its revised August interim forecast (the former raised from the initial August forecast of 1.3% and the July forecast of 1.1%). |
Eurostat confirmed that Eurozone GDP growth picked up appreciably to 1.0% quarter-on-quarter (q/q) in the second quarter of 2010. This was the best q/q growth rate since the second quarter of 2006, and was appreciably up from upwardly revised expansion of 0.3% q/q (from 0.2%) in the first quarter of 2010 and 0.2% q/q (from 0.1%) in the fourth quarter of 2009. Indeed, as the previous two quarters' relatively muted performance shows, the Eurozone has found it very difficult to develop a significant, sustainable recovery since emerging from deep recession in the third quarter of 2009 with growth of 0.4% q/q. The Eurozone's recession lasted for five quarters, with particularly sharp declines in GDP during the first quarter of 2009 (down 2.5% q/q) and the fourth quarter of 2008 (down 1.9% q/q) when global economic activity and trade nosedived amid financial-sector turmoil following the collapse of Lehman Brothers. Consequently, Eurozone GDP contracted by 4.1% in 2009, following growth of just 0.4% in 2008.
Admittedly, Eurozone GDP growth had been held back in the first quarter of 2010 by the very bad weather at the start of the year that affected economic activity in most countries, and particularly hurt construction activity. Part of the second-quarter pick-up in Eurozone GDP growth thus represented a catch-up from the lost activity in the first quarter. Meanwhile, Eurozone GDP growth picked up to 1.9% year-on-year (y/y) in the second quarter (revised up from 1.7%) from 0.8% (revised up from 0.6%) in the first quarter. In fact, the first quarter of 2010 saw the first positive y/y Eurozone growth rate since the third quarter of 2008, and compared with y/y declines of 2.0% in the fourth quarter of 2009 and a record 5.0% in the first quarter of last year.
Surging Growth in Germany Led Eurozone Expansion in Q2
All of the major Eurozone economies saw improved GDP growth during the second quarter, with Germany leading the way. Indeed, German GDP surged by 2.2% q/q in the second quarter, the strongest performance in the post-unification period, and up from growth of 0.5% q/q in the first quarter of 2010 and 0.3% q/q in the fourth quarter of 2009. This marked the fifth successive quarter of German growth following a particularly deep recession in 2008–09, when Germany was hit particularly hard by the collapse in world trade. German GDP was up 3.7% y/y in the second quarter.
The pick-up in French economic activity was less pronounced in the second quarter, as GDP growth improved to 0.6% q/q, from 0.2% q/q in the first quarter. This was on a par with the 0.6% q/q growth achieved in the fourth quarter of 2009, and marked a fifth successive quarter of generally modest expansion from a recession that had been less deep than Germany's. French GDP was up 1.7% y/y in the second quarter. Meanwhile, the Italian economy expanded by 0.4% q/q, as it had done in the first quarter. This indicated that modest Italian recovery remained intact, after GDP had suffered a relapse in the fourth quarter of 2009, when it contracted by 0.1% q/q. Italian GDP was up 1.1% y/y in the second quarter. In addition, Spain managed to show further modest growth of 0.2% q/q in the second quarter, after stumbling out of recession in the first quarter when GDP edged up just 0.1% q/q. This followed seven successive quarters of contraction until the fourth quarter of 2009, but Spanish recovery prospects continue to be limited by high unemployment, high debt levels, and an ongoing major correction in the construction sector. Consequently, Spanish GDP was still down 0.1% y/y in the second quarter. Meanwhile, the Dutch economy enjoyed an encouraging second quarter as real GDP expanded by 0.9% q/q and 2.1% y/y. This was up from growth of 0.5% q/q and 0.6% y/y in the first quarter.
Among the smaller Eurozone economies, Belgian GDP grew by 0.7% q/q in the second quarter, having stagnated in the first quarter. This was the best q/q Belgian growth since the third quarter of 2009, and pushed y/y growth up to 2.2%. Meanwhile, Austrian GDP grew by a robust 0.9% q/q, the strongest performance since early 2008, and 2.0% higher y/y. Finnish GDP spiked up 3.1% q/q after contracting 0.4% q/q in the first quarter and 0.2% q/q in the fourth quarter of 2009, so was up 3.1% y/y. Cyprus continued to recover after emerging from recession in the first quarter, as GDP increased by 0.4% q/q in the second quarter, although it was still down 0.2% y/y. Encouragingly, Slovenian GDP rebounded by 1.1% q/q in the second quarter, after dipping 0.1% q/q in the first, causing it to be up 1.5% y/y. Meanwhile, Slovakian GDP growth accelerated to 1.2% q/q in the second quarter, from 0.8% q/q in the first, resulting in y/y expansion of 5.0%. On a less positive note, Portugal grew by just 0.2% q/q, after exceeding all expectations in the first quarter, when real GDP grew 1.1% q/q, which slowed y/y growth to 1.4%, from 1.8%. Highlighting the country's woes, the Greek economy contracted at an increased rate of 1.5% q/q in the second quarter, following a drop of 1% q/q in the first quarter, thereby leaving GDP down 3.5% y/y. Second-quarter GDP data for Ireland are yet to be released.
Consumer Spending and Investment Boosted Q2 Eurozone Growth
The breakdown of second-quarter Eurozone GDP on the expenditure side is relatively encouraging, with significant contributions from both consumer spending and investment. On the output side, industrial production rose by a further 1.9% q/q, after climbing 2.3% q/q in the first quarter, while construction output rose by 0.5% q/q, after contracting 1.5% q/q in the first quarter, when it was held back by the bad weather. Most service sectors expanded at an increased rate in the second quarter.
Consumer spending rose by 0.5% q/q in the second quarter, having risen by a modest 0.2% q/q in both the first quarter of 2010 and the fourth quarter of 2009. Even so, it was still only up 0.8% y/y. There was a limited catch-up effect in consumption during the second quarter after it had been held back in some countries by the bad weather at the start of the year, while improved consumer confidence and stabilising labour markets also helped. Inflation was also relatively muted, although it did trend up to a 17-month high of 1.7% in July. Muted wage growth and the further withdrawal of some fiscal stimulus probably capped the upside for consumption, while unemployment was still high.
Meanwhile, total investment rose by 1.8% q/q across the Eurozone in the second quarter, thereby increasing for the first time since the first half of 2008. It had previously contracted by 0.4% q/q in the first quarter, and by 1.2% q/q in the fourth quarter of 2009, so was still down by 1.0% y/y in the second quarter. Gross fixed capital formation was clearly lifted in the second quarter by a rebound in construction investment, after it had been held back by the bad weather in the first quarter. Business investment also appears to have picked up in the second quarter, reflecting improved confidence. A pick up in business investment probably occurred more to enact previously delayed upgrading or replacement of capacity, rather than to add capacity. Meanwhile, government spending rose by 0.5% q/q and 1.1% y/y in the second quarter as past government stimulus measures to boost economic activity continued to have an impact.
Inventories added 0.2 percentage points to q/q Eurozone growth as they continued to be rebuilt after being pared during the recession. However, this was well down from the 0.8-percentage-point positive contribution in the first quarter. Consequently, Eurozone domestic demand expanded 0.9% q/q in the second quarter, which was up from growth of 0.7% q/q in the first quarter.
Net trade added a further 0.1 percentage points to Eurozone q/q growth in the second quarter. Export growth jumped to 4.4% q/q from 2.4% q/q in the first quarter, lifted by a very competitive euro (which hit a four-year low of US$1.185:1 euro in June) and decent global growth. Exports were up 12.0% y/y in the second quarter. However, imports also rose, by 4.4% q/q, and were up 12.8% y/y, reflecting improved Eurozone domestic demand. Imports had previously risen by 4.0% q/q in the first quarter, when Eurozone net trade cut 0.5 percentage points off q/q GDP growth.
Outlook and Implications
Latest data and survey evidence indicate that Eurozone economic activity is holding up pretty well overall in the third quarter after the much improved second-quarter performance, although there are some signs of moderation.
Eurozone economic activity is currently still being supported by low interest rates and some fiscal stimulus measures, in addition to the help provided to banking sectors. Meanwhile, inventory developments are currently still favourable, as stocks are rebuilt after being slashed in late 2008/early 2009. In addition, Eurozone exports have benefited from improved global economic activity and trade.
Nevertheless, although Eurozone GDP growth improved appreciably in the second quarter, the fact remains that recovery has been fitful and gradual overall since the region exited five quarters of deep recession in the third quarter of 2009. Furthermore, there is a very real danger that growth will increasingly lose momentum over the coming months.
The Eurozone sovereign-debt crisis is leading to fiscal policy being tightened earlier and faster in a number of member countries, and it is also periodically affecting economic activity by weighing on confidence and causing market turmoil.
In particular, we suspect that the upside for consumer spending will be limited, given that the Eurozone unemployment rate is at a12-year high of 10.0% and could well rise further, wage growth is muted, and fiscal squeezes will increasingly bite. Fiscal policy across the Eurozone was already becoming less supportive in 2010, even before the pressure for tighter policy from the Eurozone sovereign-debt crisis.
Meanwhile, substantial spare capacity, still relatively tight credit conditions, and many companies' uncertainties over the longer-term strength of the upturn mean that business investment is also likely to be limited. Furthermore, inventory adjustments can only support economic growth for a limited period, and may nearly have run their course.
On top of this, we expect global growth to be softer over the latter months of 2010 and the first half of 2011, which would not be good news for Eurozone exporters, especially as the euro has firmed appreciably from its early June four-year low of US$1.188:1 euro. Indeed, the euro traded as high as US$1.33:1 euro in August, before falling back to its current level around US$1.28:1 euro.
We currently project that Eurozone GDP growth in 2010 will be 1.4%. All of the major Eurozone economies are seen expanding in 2010, with the exception of Spain, which is seen contracting a further 0.4%. Germany is expected to lead the way in 2010, with growth of 3.2%, while far more modest expansion is anticipated in France (1.3%), the Netherlands (1.1%), and Italy (1.0%).
After slowing anew in the second half of 2010 and early 2011, the Eurozone's upturn is expected to gradually become more firmly established as 2011 progresses. Nevertheless, the upside for Eurozone growth will be limited in 2011 with real GDP growth projected at 1.3%, and beyond by widespread marked tightening of fiscal policy, as governments seek to rein in bloated budget deficits.