Slowing eurozone needs fiscal boost

The preliminary estimate of eurozone GDP shows the monetary union’s economy slowed in the second quarter to 0.2% quarter-on-quarter from 0.4% growth in the first quarter of the year.

The year-on-year comparison also showed a slowdown, from 1.2% to 1.1% over the same period. The figures published today were in-line with expectations, but as these are early estimates, few details of the drivers exist.

What does the data from member states show?

Some member states have also published their preliminary estimates, which provide some colour.

France saw a marginal slowdown from 0.3% to 0.2% GDP growth, reporting slower household spending and some destocking. To the upside, investment picked up to its fastest rate of quarterly growth for a year, while government spending also grew at its fastest rate since the third quarter of 2017. Meanwhile, France saw an improvement in its net trade performance, but only because there was a slowdown in imports. Growth in exports remains sluggish, which is unsurprising given the ongoing tensions and uncertainty in global trade.

It was a similar story elsewhere in the eurozone. Spain reported a slowdown from 0.7% to a 0.6% growth, while growth in Belgium eased from 0.3% to 0.2%. Austria’s growth fell from 0.4% to 0.3%, while Italy’s economy stalled, having grown by 0.1% in the first quarter.

Germany has yet to report its growth figures, but industrial production data already available points to a potential contraction for the second quarter.

Overall, a subdued set of growth figures for the second quarter. External demand remains weak amidst the uncertainty caused by rising global protectionism, while a temporary boost from warm weather from the start of the year has faded.

What is the outlook for the second half of 2019?

Looking ahead, private business surveys are weak, especially those tracking the manufacturing sector. A further risk that is unfolding is the dangerously low water levels of the river Rhine – a crucial shipping transport route for German manufacturers. If water levels continue to fall as they did last autumn, we could see another closure of the route which would hit chemical producers particularly hard.

In addition to the growth figures, the early inflation figures were also released, showing a fall in the annual rate to 1.1% in July from 1.3% in June, and the lowest inflation rate since February 2018. Subdued growth coupled with low inflation support the case for policy easing.

Is monetary easing the solution to slower growth?

The European Central Bank is inching its way to potentially cutting interest rates further and/or restarting quantitative easing. However, and as we have said in the past, we do not believe this will be enough. Fiscal policy has to play a greater role in boosting demand, especially where fiscal space exists in Northern Europe.