Europe's Recovery Solidifies

 

Azad Zangana, European Economist at Schroders, comments on today's eurozone GDP figures

“GDP figures released this morning showed the eurozone recovery solidified at the end of 2013. Eurozone aggregate growth rose to 0.3% in the three months to December - a slight acceleration compared to the 0.1% growth recorded in the third quarter.

“The results were in line with our forecast, but slightly above the Bloomberg consensus of 0.2%. Comparing Q4 to a year earlier, the eurozone grew by 0.5%. However, for 2013 as a whole, the economy contracted by 0.4%, which is not only an improvement in the rate of contraction compared to 2012 (-0.6), but also highlights the turnaround in economic activity, particularly in the second half of last year.

“Within the eurozone, Germany saw quarterly growth pick up from 0.3% to 0.4% in the fourth quarter, while France surprised the consensus by achieving 0.3% growth. Spain’s 0.3% matched the earlier flash estimate, while Italy achieved 0.1% growth, the first quarterly rise in activity since the second quarter of 2011. Elsewhere, both the Netherlands and Portugal outperformed expectations by growing by 0.7% and 0.5% respectively. Austria grew by a solid 0.3%, but Finland disappointed with a 0.8% contraction.

"Very few details are available on the components of GDP at this stage, but the French data provides a little insight. In France, all of the major final demand indicators improved. Household consumption increased by 0.5% on the quarter, while both investment and government spending increased by 0.6% and 0.3%. Net trade made a positive contribution as exports grew faster than imports, while inventories fell on the quarter. In Germany, the statistics office suggest net trade was the biggest positive contributor, while private consumption was a little softer. Investment is likely to have picked up, although inventories were also a drag, like in France. The falls in inventories coupled with the already low levels suggest more support from inventory rebuilding could follow in the coming quarters. Indeed, this is our central case scenario for 2014. Support from the inventory cycle will be very important to pushing growth back above 1% in 2014.

"Overall, this is an encouraging set of data in the wake of banks cutting back lending in preparation for the asset quality review. Risks to our forecast of 1.1% eurozone growth in 2014 are shifting to the upside as financial conditions continue to improve. Certainly, the stabilisation in labour markets being reported has been unexpected. Whilst deflation concerns are likely to persist in coming months as inflation heads lower, the European Central Bank will be pleased to see that growth is slowly improving, which should help raise inflation in the second half of the year and in 2015.”

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