Eurozone GDP Plunges 4.8% Y/Y in Q1

Eurostat confirmed that Eurozone GDP contracted by a massive 2.5% quarter-on-quarter (q/q) in the first quarter of 2009. However, the year-on-year (y/y) contraction in GDP in the first quarter was revised from 4.6% to 4.8%. This marked a significant further deepening in the Eurozone's recession, as GDP had previously plunged by 1.8% q/q in the fourth quarter of 2008 after declining by 0.3% q/q in both the third and second quarters.

Massive German Contraction Drags Down Eurozone GDP in Q1

Eurozone GDP was dragged down in the first quarter by massive contraction of 3.8% q/q in Germany. This was the sharpest decline since German reunification in 1990, and marked the fourth successive q/q decline in GDP including a drop of 2.2% in the fourth quarter of 2008. Consequently, German GDP plunged by 6.9% y/y in the first quarter of 2009. The Italian recession also deepened in the first quarter as GDP contracted by 2.4% q/q and 5.9% y/y, following a fall of 2.1% q/q in the fourth quarter. The Italian economy started to contract in the second quarter of 2008. Meanwhile, the French economy also contracted for a fourth successive quarter, although the rate of decline actually narrowed modestly to 1.2% q/q in the first quarter of 2009 from 1.5% q/q in the fourth quarter of 2008. French GDP was down by 3.2% y/y in the first quarter of 2009.

Meanwhile, the contraction in Spanish GDP widened to 1.9% q/q and 3.0% y/y in the first quarter of 2009 from 1.0% q/q in the fourth quarter of 2008. This marked the third successive quarter of contraction, with both the q/q and y/y declines being the deepest since the GDP series started in 1970. Slumping construction and housing market activity is weighing down heavily on the Spanish economy in conjunction with the global economic slowdown and financial crisis. The Dutch recession also deepened markedly in the first quarter of 2009 as GDP plunged by 2.8% q/q and 4.5% y/y. This was more than double the 1.2% q/q drop in GDP seen in the fourth quarter of 2008 and the successive quarter of contraction.

Particularly sharp deterioration in the first quarter of 2009 was suffered by the export-orientated Austrian economy, which saw GDP contract by 2.8% q/q and 2.9% y/y. Austrian GDP had previously only fallen by 0.4% q/q in the fourth quarter of 2008 and had been flat q/q in the third quarter. Belgium also officially moved into recession in the first quarter of 2009 as GDP declined by 1.6% q/q and 3.0% y/y following contraction of 1.7% q/q in the fourth quarter of 2008. Belgian GDP had previously been flat in the third quarter of last year. Meanwhile, the Portuguese economy contracted for a third successive quarter in the first quarter of 2009 as GDP fell by 1.5% q/q and 3.7% y/y. In addition, the Greek economy suffered its first quarter of contraction as GDP fell by 1.2% q/q, thereby limiting y/y growth to 0.3%. Elsewhere, Slovakian GDP fell by 5.4% y/y in the first quarter of 2009, having been up by 2.5% y/y in the fourth quarter of 2008 and by 7.9% y/y in the first quarter of 2008. However, Cyprus continued to avoid contraction in the first quarter of 2009, as GDP was flat q/q and up 1.6% y/y. First-quarter GDP data for Ireland, Slovenia, and Malta are yet to be released.

Plunging Exports, Investment, and Inventories Drive Q1 GDP Down

The breakdown of Eurozone GDP in the first quarter of 2009 showed widespread weakness, with very sharp falls in exports, investment, and inventories being the major factors. In addition, consumer spending fell by 0.5% q/q and 1.1% y/y in the first quarter, having previously fallen by 0.4% q/q in the fourth quarter of 2008. This indicated that markedly rising unemployment, tightening credit conditions, and elevated concerns over the economic situation, personal finances, and jobs outweighed the benefit of retreating inflation and lower interest rates.

Gross fixed capital formation plunged by 4.2% q/q and 10.4% y/y in the first quarter of 2009. Business investment clearly fell very sharply as companies faced slumping demand, weakening capacity utilisation, very tight credit conditions, and deteriorating profitability. Furthermore, construction investment was undoubtedly very weak in a number of countries, most notably Spain and Ireland. Eurozone gross fixed capital formation had previously contracted by 4.3% q/q in the fourth quarter of 2008, 1.0% q/q in the third quarter, and 1.3% q/q in the second.

In addition, a substantial drawdown of inventories across the Eurozone contributed 1.0 percentage point to the overall 2.5% q/q contraction in GDP. This marked a very necessary adjustment, particularly in the manufacturing sector, following the collapse in demand in late-2008/early-2009. Meanwhile, government spending was flat q/q but rose by 1.7% y/y across the Eurozone in the first quarter of 2009, after increasing by 0.4% q/q in the fourth quarter of 2008. Government spending is being lifted in some countries by fiscal efforts to support economic activity.

Net trade was markedly negative in the first quarter of 2009, cutting 0.3 percentage point off q/q Eurozone GDP as exports again plunged even more than imports. This followed a negative contribution of 0.9 percentage point from net trade in the fourth quarter of 2008. Exports plummeted by 8.1% q/q and 15.5% y/y in the first quarter, having previously fallen by 7.2% q/q in the fourth quarter of 2008. Eurozone exports were clearly hit very hard by global recession and collapsing trade, as well as the lagged impact of the persistently strong euro (which hit a lifetime high of US$1.604 in July 2008). Meanwhile, Eurozone imports fell by 7.2% q/q and 11.7% y/y in the first quarter of 2009, reflecting substantially contracting domestic demand. Imports had previously declined by 5.1% q/q in the fourth quarter of 2008.

Outlook and Implications

There are currently mounting, widespread signs that the rate of contraction in Eurozone economic activity is moderating substantially. In particular, both the manufacturing and service sector Eurozone purchasing managers' surveys pointed to slowing contraction for a third successive month in May, causing the composite indicator to climb to an eight-month high of 44.0 from 41.1 in April and a record low of 36.2 in February. Admittedly, this is still appreciably below the 50.0 level that indicates unchanged activity. Encouragingly, though, overall new orders and backlogs of work contracted at significantly reduced rates in May, while business expectations in the service sector climbed to a 13-month high. Meanwhile, overall Eurozone economic sentiment rose for a second successive month in May to reach a six-month high, with both consumer and business confidence improving overall. It should be borne in mind, however, that this was from an extremely depressed level, as overall economic sentiment in the Eurozone had been at its lowest level in March since the European Commission's survey started in 1985.

Nevertheless, Eurozone economic activity is clearly still very weak and in recessionary territory. Heightened financial sector turmoil (a number of European banks have had to be rescued or helped by the authorities) and very tight credit conditions are still weighing down on economic activity across the Eurozone. Unemployment has increased sharply and seems certain to rise substantially further, thereby countering the boost to purchasing power coming from sharply reduced inflation. Meanwhile, significant corrections in overvalued housing markets in Spain and Ireland are hitting the rest of the economy hard, and this may well happen to a lesser extent in some other countries, possibly including France and the Netherlands. Finally, global recession and sharply reduced trade flows have led to substantially lower foreign demand for Eurozone goods and services. This is hitting Germany particularly hard.

These factors are still more than outweighing the help to Eurozone economic activity coming from sharply lower oil and commodity prices compared to the mid-2008 peak levels, a marked retreat in the euro from its July 2008 peak of US$1.60 (although it is currently trading back up to around US$1.40 after dipping as low as US$1.25), significant fiscal stimulus across the region, and lower interest rates (the ECB has cut its key interest rate from 4.25% to 1.00% since last October).