Schroders Quickview: French activity rebounds to lift eurozone GDP growth
In a bumper day of data, eurozone quarterly growth is estimated to have doubled to 0.6% in the first quarter compared the end of 2015, beating consensus expectations of 0.4% growth.
This is the first Eurostat “flash” GDP release, published earlier than normal (30 days after the end of the quarter). As a result little detail is available at this stage. The usual 45-day release will still be published with the normal breakdown of contributions from member states.
France leads rebound
However, what we do know is that French GDP rebounded in the first quarter to 0.5% growth from 0.3% in the fourth quarter of 2015, against consensus expectations of a smaller bounce of 0.4%.
We had expected this upturn as activity had appeared to slow in reaction to the Paris terrorist attacks last year. Indeed, the main pickup in the latest data was due to an acceleration in consumption and business investment growth.
It also means that if confidence has now recovered from the events of last year, we should see growth moderate over the rest of this year, rather than this pace of growth being maintained.
France still has significant structural issues which are unlikely to be resolved before the presidential elections next year.
Spain and Austria surprise on the upside
Spain also surprised to the upside by growing 0.8% for the third consecutive quarter, despite a marked slowdown in manufacturing output over January and February.
This bodes well for the rest of the year, although we do expect the annual growth rate to temper from its current rate of 3.4% to around 3% on the back of continued political uncertainty.
Otherwise, Austria also did better than expected as growth accelerated from 0.2% to 0.6% over the same period – its fastest quarterly growth rate since the start of 2015.
German GDP has not been reported yet, but early indicators show a significant pickup in industrial production and retail sales, which should help Germany achieve an acceleration in its GDP when the data is published in a couple of weeks time.
While eurozone growth appears to be on the right track, the same cannot be said for inflation, which slipped to -0.2% year-on-year in April, disappointing consensus expectations.
Energy continues to be the biggest drag on the headline rate, although the core rate of inflation (excluding food, energy, alcohol and tobacco) also fell from 1% in March to 0.8% in April.
The early Easter holiday would have caused inflation to be a little stronger than normal in March and then weaker in April, but the overall picture is still poor, with inflation in some member states deeply negative (Spain -1.2%).
The recent strength of the euro, despite stimulus measures from the European Central Bank (ECB), has undoubtedly played a role in keeping inflation subdued.
We continue to expect the ECB to cut interest rates further as inflation and the euro fail to respond to the ECB’s actions.
Lastly, Eurostat also reported a fall in eurozone unemployment – down to 10.2% in March compared to 10.4% in February and 11.2% in March 2015.
The ongoing falls in unemployment suggest GDP has been growing above its potential or trend rate. Over time, this should remove most of the excess capacity in the labour market and eventually push wages and inflation higher.
However, it could take another two years before we consider inflation as being back to normal – a luxury the ECB may not be able to afford given its legal mandate.
It is worth noting that falls in unemployment rates were widespread across the eurozone, suggesting that the macroeconomic recovery is broadening out.
Overall, this was a good set of data for the monetary union. Despite weaker business survey readings over the first quarter, underlying growth has proven to be more resilient.
Inflation continues to disappoint though and we remain of the view that the ECB will add further stimulus. Even if the authorities decide against this course of action, we are confident that inflation will recover in time given it is a lagging indicator.
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