Eurozone GDP Growth Stutters in Q4 as Germany Stagnates and Italy Contracts Anew

Eurozone GDP growth was limited to a desperately disappointing 0.1% quarter-on-quarter (q/q) in the fourth quarter of 2009, according to a preliminary estimate from Eurostat. While it is evident that the Eurozone economy has been finding it very difficult to kick on after exiting recession in the third quarter of 2009, it had been hoped that the fourth-quarter growth rate would be broadly similar to the 0.4% q/q expansion achieved in the third quarter. The Eurozone's return to growth in the third quarter of 2009 had followed five quarters of contraction. The contraction had been particularly deep in the first quarter of 2009 and the fourth quarter of 2008, when global economic activity and trade nosedived amid financial sector turmoil following the collapse of Lehman Brothers. Specifically, Eurozone GDP contracted by 0.1% q/q in the second quarter of 2009, a record 2.5% q/q in the first, 1.9% q/q in the fourth quarter of 2008, 0.4% q/q in third quarter of 2008, and 0.3% q/q in the second quarter.

Despite the return to growth in the second half of 2009, Eurozone GDP contracted by 4.0% over the year as a whole. GDP was still down 2.1% year-on-year (y/y) in the fourth quarter, but at least this was a significant moderation from the record first quarter drop of 5.0% y/y.

Germany Stagnated, Italy Contracted Anew in Q4 2009

Overall, Eurozone economic activity was held back in the fourth quarter of 2009 by German economic activity being only flat q/q and Italy suffering renewed contraction. Germany had previously led the Eurozone out of recession with growth of 0.7% q/q in the third quarter of 2009 and 0.4% q/q in the second quarter. This followed four quarters of contraction, including a 3.5% q/q plunge in the first quarter of 2009. Consequently, German GDP was still down 2.4% y/y in the fourth quarter of 2009 and contracted by 4.9% over the year as a whole. German exports have played a leading role in the country's overall recovery from recession, just as they were a major factor in the recession being so marked when they were hammered by the collapse in world trade in late-2008/early-2009. Meanwhile, the Italian economy suffered renewed contraction in the fourth quarter as GDP fell by 0.2% q/q. This may have been partly a correction after Italy had exited recession in the third quarter with surprisingly firm growth of 0.6% q/q. The fourth-quarter relapse means that the Italian economy had contracted for six of the past seven quarters and left GDP down 2.8% y/y.

In contrast, French GDP growth accelerated to 0.6% q/q in the fourth quarter of 2009, from 0.2% q/q in the third quarter and 0.3% q/q in the second quarter. Although France had also previously experienced four quarters of recession through to the first quarter of 2009, the contraction had been much shallower than in Germany, so GDP declined a lesser 2.2% overall in 2009 and was down by just 0.3% y/y in the fourth quarter.

Apart from France, only Slovakia saw improved growth in the fourth quarter of 2009. Slovakian GDP growth picked up to 2.0% q/q from 1.6% q/q in the third quarter, although it was still down 2.7% y/y. The Netherlands saw GDP expansion moderate to 0.3% q/q in the fourth quarter from 0.5% q/q in the third quarter. This followed four quarters of contraction. The y/y decline in Dutch GDP moderated to 2.2% in the fourth quarter from a peak of 5.5% in the second quarter. GDP contracted 4.0% overall in 2009. Meanwhile, Austrian GDP growth edged back to 0.4% q/q in the fourth quarter after the country had exited recession in the third quarter with expansion of 0.5% q/q. This caused the y/y decline to narrow to 1.8% in the fourth quarter from a peak of 4.5% in the second quarter.

Spain remained in recession in the fourth quarter as GDP edged down by a further 0.1% q/q. This was a seventh successive quarter of contraction, but at least it was down from GDP falls of 0.3% q/q in the third quarter, 1.1% q/q in the second quarter, and 1.6% q/q in the first. In y/y terms, Spanish contraction moderated to 3.1% in the fourth quarter from a record 4.2% in the second. Despite substantial government stimulus measures, Spanish recovery prospects continue to be limited by ongoing corrections in the housing and labour markets as well as the construction sector. Meanwhile, Greece's problems were highlighted by its recession deepening in the fourth quarter as the q/q fall in GDP picked up to 0.8% q/q from 0.5% q/q in the third quarter. This was a fifth successive q/q decline and left GDP down 2.6% y/y. Cyprus also contracted for a fifth quarter running, although the rate of decline narrowed to 0.3% q/q in the fourth quarter from 0.8% q/q in the third quarter. Cypriot GDP was down 2.7% y/y. Completing the largely softer picture, Portuguese GDP was only flat q/q in the fourth quarter following expansion of 0.6% q/q in both the third and second quarters. Portuguese GDP was down 0.8% y/y in the fourth quarter.

Inventory Developments and Net Trade Likely Led Limited Q4 Eurozone Growth

The component breakdown of the fourth-quarter Eurozone GDP is not yet available and it is hard to determine a clear pattern of the overall pattern. IHS Global Insight suspects that the little Eurozone growth that there was in the fourth quarter was primarily due to favourable inventory developments and a positive contribution from net trade as exports grew more than imports. Certainly, the French GDP data show that stocks contributed 0.9 percentage point to growth, while the German Federal Statistics Office indicated that only net trade made a positive contribution to GDP in the quarter. However, French net trade was sharply negative—by 0.7 percentage point. Government spending also probably contributed to growth, reflecting ongoing fiscal stimulus. However, despite growing appreciably in France, consumer spending is unlikely to have contributed much to Eurozone growth in the fourth quarter and could well have been negative given that Eurozone retail sales contracted by 0.2% q/q. Consumer spending certainly contracted in Germany. Meanwhile, investment is likely to have contracted for a seventh consecutive quarter, albeit at a much-reduced rate compared to the first half of 2009 and late-2008.

Outlook and Implications

While we do not expect the Eurozone to relapse back into recession, GDP growth of just 0.1% q/q in the fourth quarter of 2009 highlights the fact that the region still faces very challenging economic and financial conditions.

Latest data and survey evidence point to ongoing growth in the Eurozone in the first quarter of 2010, but there is still little real sense that the recovery is kicking on. For example, the composite indicator for the Eurozone purchasing managers' manufacturing and service-sector surveys compiled by Markit Economics eased back to 53.7 in January after reaching a 26-month high of 54.2 in December, although it still marked a sixth successive month that the indicator had been above the critical 50.0 level that signifies stable activity. The survey for the key Eurozone service sector showed that growth in activity and incoming new business slowed modestly in January. This outweighed a further pick up in manufacturing activity to a 24-month high in January. Meanwhile, concerns remain over the strength of consumer spending, with latest data showing that Eurozone retail sales volumes were only flat month-on-month in December and down 1.6% y/y. On a more positive note, overall Eurozone economic sentiment rose for a tenth successive month in January to reach a 19-month high. Most business sectors saw a further pick up in sentiment in January, but consumer confidence was only stable, albeit at the highest level since mid-2008.

Eurozone economic activity is currently still being supported by monetary and fiscal stimulus measures in addition to the help provided to banking sectors. Furthermore, recent low consumer price inflation/deflation has boosted consumers' purchasing power. Meanwhile, inventory developments are now generally more favourable as stocks are either run down at a reduced rate after being slashed in late-2008/early-2009 or are even starting to be rebuilt in a number of countries. In addition, Eurozone exports have benefited from a pick up in global economic activity and trade.

Nevertheless, we suspect that Eurozone economic recovery will remain gradual during 2010 and will be prone to losses of momentum. Economic activity will be hampered by the withdrawal of some stimulus measures, including car scrappage schemes and employment support measures. In addition, inventory developments can only support economic growth for a limited period without a significant pick up in demand. Meanwhile, Eurozone growth is expected to be limited for some time to come by relatively high and still rising unemployment, persistent tight credit conditions amid still marked financial sector problems, and significant excess capacity (which limits the need for business investment). The Eurozone will therefore be fervently hoping that global growth and trade can sustain recovery over the coming months, thereby boosting its own recovery prospects. And the Eurozone will be helped by the euro retreating to currently trade around US$1.36 compared to last November's peak of US$1.5145.

On balance, we project that Eurozone GDP growth in 2010 will be limited to 1.0%. All of the major Eurozone economies are seen expanding in 2010, with the exception of Spain (which is seen contracting by a further 0.5%). Germany is expected to lead the way in 2010 with growth of 1.5%, while expansion is also anticipated in France (1.2%), Italy (0.9%), and the Netherlands (1.1%).

The Eurozone's upturn is expected to gradually become more firmly established in 2011—when GDP growth is forecast at 1.5%—helped by a stabilisation and then gradual improvement in labour markets, as well as by stronger global growth. However, the upside for Eurozone growth is likely to be limited both in 2011 and beyond by widespread marked tightening of fiscal policy, as governments seek to rein in bloated budget deficits. In fact, the probable fragility of the Eurozone recovery means that both governments and the ECB need to be wary about withdrawing stimulus measures too soon or too aggressively. Consequently, we believe the ECB is likely to keep interest rates down at 1.00% until at least late-2010, and it could very well delay lifting them until 2011.