Eurozone GDP Falls 0.2% in Q3, Putting Region into Recession

Eurozone GDP contracted by 0.2% quarter-on-quarter (q/q) in the third quarter of 2008, according to a "flash" estimate from Eurostat. This matched the 0.2% q/q GDP decline seen in the second quarter, meaning that the Eurozone is technically in recession (as defined by two successive quarters of contracting GDP). While the weakness of the Eurozone economy in the second quarter was partly a correction to first-quarter growth of 0.7% q/q inflated by some temporary factors (including a very mild winter substantially lifting construction investment), there is no denying that the third-quarter contraction was a genuine reflection of the downturn across the region. As a result, annual Eurozone GDP growth moderated to just 0.7% in the third quarter of 2008 from 1.4% in the second quarter and 2.1% in the first.

Widespread Weakness in Third Quarter

Several Eurozone economies suffered contraction in the third quarter, with Germany and Italy entering recession. German GDP contracted by 0.5% q/q following a decline of 0.4% q/q in the second quarter. In contrast, the economy had expanded by 1.4% q/q in the first quarter when it was boosted by very strong construction investment. Consequently, annual German GDP growth moderated to 0.8% in the third quarter from 1.9% in the second quarter and 2.7% in the first. Italian GDP also contracted by 0.5% q/q in the third quarter after falling 0.4% q/q in the second quarter. Indeed, this was the third quarter of Italian contraction in the space of four quarters, with the result that GDP was down by 0.9% year-on-year (y/y) in the third quarter.

Spanish GDP contracted 0.2% q/q in the third quarter after edging up by just 0.1% q/q in the second as the slumping construction sector and housing market weighed down ever more heavily on the economy. This was the first Spanish q/q contraction for 15 years and brought the annual growth rate down to just 0.9% in the third quarter. Meanwhile, the Dutch economy was flat q/q in the third quarter, as it had been in the second quarter. This caused annual Dutch growth to slow to 1.8% in the third quarter from 3.0% in the second quarter and 4.1% at the end of 2007. The Portuguese economy was also flat q/q in the third quarter after it had grown by 0.3% q/q in the second quarter. Portugal's annual growth rate was stable at 0.7% in the third quarter.

Somewhat surprisingly, French GDP edged up 0.1% q/q in the third quarter after contracting by 0.3% q/q in the second quarter. Nevertheless, annual French GDP growth halved to 0.6% in the third quarter from 1.2% in the second. Belgium also grew by 0.1% q/q in the third quarter, although this was down from expansion of 0.3% q/q in the second quarter and the y/y growth rate moderated to 1.2% from 1.9%. Similarly, Austrian GDP growth slowed to 0.1% q/q and 1.5% y/y in the third quarter from 0.3% q/q and 2.0% y/y in the second. Elsewhere, Greek GDP growth moderated to 0.5% q/q and 3.1% y/y in the third quarter from 1.0% q/q and 3.6% y/y in the second, while Cyprus' expansion was reduced to 0.6% q/q and 3.5% y/y from 0.9% q/q and 4.0% y/y. Details of third-quarter GDP are not yet available for the other Eurozone countries.

Net Trade Weighs Down on Eurozone Economy

Eurostat has yet to release a component breakdown of Eurozone GDP in the third quarter; nevertheless, on the expenditure side it is likely that net trade was a significant drag as the very strong euro (it hit a lifetime high of US$1.604 in July) and slowing global economic activity hit exports. Significantly, the German statistics office reported that exports saw a decline in the third quarter, while imports were up considerably. It is also likely that investment lost further momentum after faltering markedly in the second quarter. However, consumer spending may have seen marginal growth after contracting in both the second (by 0.2% q/q) and first (0.1% q/q) quarters. The German statistics office reported that there was a "slight" increase in household consumption in the third quarter while French consumer spending rose by 0.2% q/q.

On the output side, industrial production was a significant drag on growth as it contracted by 0.9% q/q in the third quarter. Furthermore, the purchasing managers' survey points to very weak service sector activity through the quarter.

Outlook and Implications

Latest data and survey evidence suggests that the Eurozone downturn is currently deepening. Consumer and business confidence have fallen substantially across the Eurozone and stood at a near 15-year low combined in October 2008, thereby undermining prospects for investment, employment and consumer spending. Retail sales are generally soft, the manufacturing sector is struggling hugely, and survey evidence points to service-sector activity contracting in October at the deepest rate in at least 10 years. Meanwhile, exports are showing clear signs of faltering.

Heightened financial sector turmoil (a number of European banks have had to be rescued or helped by the authorities), very tight credit conditions and sharply lower equity prices are clearly hurting economic activity across the Eurozone and the full effect is still feeding through. Eurozone labour markets are now softening appreciably overall, which will increasingly counter the anticipated boost to recent sharply squeezed purchasing power coming from moderating inflation over the coming months. 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, markedly weakening global growth is hitting foreign demand for Eurozone goods and services.

These factors are more than outweighing the help to Eurozone economic activity now coming from sharply lower oil and commodity prices, a significant retreat in the euro from its July peak of US$1.60 (it dipped below US$1.25 in November) and lower interest rates (the ECB has cut its key interest rate from 4.25% to 3.25% since October and further reductions seem inevitable).

Consequently, in our November forecast, Global Insight projects that Eurozone GDP will grow by just 1.0% in 2008 and then contract by 0.5% in 2009. All of the major Eurozone economies are forecast to endure recession. German GDP is projected to contract by 0.7% in 2009 after rising by 1.3% in 2008, while French GDP is seen falling 0.3% in 2009 after growing by a very modest 0.8% in 2008. Italian GDP is projected to contract in both 2008 (by 0.2%) and 2009 (by 0.9%), while the Spanish economy is forecast to decline by an even sharper 1.0% in 2009 after expanding by a 15-year low of 1.2% in 2008.

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