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Eurozone GDP fell 0.2% quarter-on-quarter and 1.0% year-on-year in the first quarter of 2013. This marked a record sixth successive quarter of contraction.
IHS Global Insight perspective
Eurozone GDP contracted by 0.2% quarter-on-quarter (q/q) in the first quarter of 2013. Although this was down markedly from a drop of 0.6% q/q in the fourth quarter of 2012, it still marked a record sixth successive quarter of GDP contraction.
Latest survey evidence for the Eurozone has been largely disappointing, indicating that it is very possible that the Eurozone could see a further small drop in GDP during the second quarter. In particular, weak purchasing managers' surveys for the manufacturing and services sectors in March and April and a widespread relapse in business confidence do not bode well for growth prospects.
IHS Global Insight expects the Eurozone to suffer GDP contraction of 0.7% in 2013, with very gradual recovery only starting in the latter months of the year.
A preliminary estimate from Eurostat indicates that Eurozone GDP contracted by 0.2% quarter-on-quarter (q/q) and 1.0% year-on-year (y/y) in the first quarter of 2013. This exactly matches the IHS Global Insight forecast. It marks a record sixth successive quarter of Eurozone GDP contraction, with the only crumb of comfort being that the rate of decline was down markedly from a drop of 0.6% q/q in the fourth quarter of 2012 (which had been the sharpest decline since the first quarter of 2009). Eurozone GDP had earlier fallen by 0.1% q/q in the third quarter of 2012, 0.2% q/q in the second quarter, 0.1% q/q in the first quarter, and 0.3% q/q in the fourth quarter of 2011. Overall, Eurozone GDP contracted by 0.5% in 2012. This followed growth of 1.4% in 2011 and 2.0% in 2010.
German return to marginal growth limits Eurozone contraction
The contraction in Eurozone GDP in the first quarter of 2013 was limited by Germany returning to marginal growth of 0.1% q/q. German GDP had slumped by 0.6% q/q in the fourth quarter of 2012 following modest growth throughout the first three quarters of last year as its previously resilient economy was affected by both the Eurozone's problems and by muted global growth. Even so, German GDP was down 0.1% y/y in the first quarter of 2013.
However, France officially moved back into recession in the first quarter as GDP contracted by 0.2% q/q, as it had done in the fourth quarter of 2012. In fact, French GDP struggled throughout 2012 as it had earlier only edged up 0.1% q/q in the third quarter after contracting 0.2% q/q in the second quarter and 0.1% q/q in the first. Consequently, French GDP was down 0.4% y/y in the first quarter of 2013. Meanwhile, the Netherlands suffered a third successive quarter of contraction as GDP edged down by a further 0.1% q/q in the first quarter of 2013 following drops of 0.4% q/q in the fourth quarter of 2012 and 1.0% q/q in the third quarter. Dutch GDP was down 1.3% y/y in the first quarter of 2013. In fact, the Dutch economy has now suffered GDP declines in six of the last eight quarters.
Among the other core Eurozone economies, Belgium managed to eke out marginal growth of 0.1% q/q in the first quarter, its first expansion for a year as GDP had previously fallen 0.1% q/q in the fourth quarter of 2012 following a flat performance in the third quarter and a drop of 0.4% q/q in the second quarter. Even so, Belgian GDP was down by 0.5% y/y in the first quarter. However, Austria was unable to return to growth as GDP was only flat q/q in the first quarter of 2013 after edging down by 0.1% q/q in the fourth quarter of 2012 and being flat in the third quarter. Consequently, Austrian GDP was flat y/y.
GDP contraction continues across southern periphery Eurozone countries
GDP contraction continued in all the struggling southern periphery Eurozone economies in the first quarter of 2013. Italian GDP contracted for a seventh successive quarter and still appreciably, as GDP fell 0.5% q/q following a particularly sharp drop of 0.9% q/q in the fourth quarter of 2012. Consequently, Italian GDP was down 2.3% y/y in the first quarter of 2013. Spanish GDP also declined for a seventh successive quarter, with its rate of decline similarly slowing to a still marked 0.5% q/q in the first quarter of 2013 from 0.8% q/q in the fourth quarter of 2012; Spanish GDP was down by 2.0% y/y in the first quarter. Portugal suffered a 10th successive quarter of q/q contraction in the first quarter of 2013 as GDP fell by a further 0.3% q/q after plunging 1.8% q/q in the fourth quarter of 2012. This left Portuguese GDP down by 3.9% y/y. GDP contraction actually accelerated in Cyprus to 1.3% q/q and 4.1% y/y in the first quarter of 2013 from 1.2% q/q and 3.4% y/y in the fourth quarter of 2012. In some slightly better news, the y/y decline in Greek GDP moderated to 5.3% in the first quarter of 2013 from 5.7% in the fourth quarter of 2012 and 6.7% y/y in the third. Greek GDP has been shrinking y/y since the third quarter of 2008.
Among the smaller economies, Slovakia managed to grow by 0.3% q/q and 0.9% y/y in the first quarter of 2013, which was up from growth of 0.1% q/q in the fourth quarter of 2012. However, Finland moved back into recession as GDP edged down by 0.1% q/q and 2.0% y/y in the first quarter following contraction of 0.6% q/q in the fourth quarter of 2012. There was a particularly marked relapse in Estonia, where GDP contracted 1.0% q/q in the first quarter of 2013 following growth of 0.6% q/q in the fourth quarter of 2012. Consequently, y/y growth slumped to 1.2% from 3.7%. GDP data for the first quarter of 2013 are yet to be released for Ireland and Slovenia.
Falling investment likely to have weighed down on Eurozone GDP
A components breakdown of Eurozone GDP growth in the first quarter of 2013 is yet to be released. Available data from individual countries suggest that investment fell appreciably across the Eurozone (including in Germany, France, and the Netherlands). Although business confidence was generally firmer in the first quarter of 2013, it was still low compared with long-term norms and it relapsed in March. Furthermore, there is generally little need for most businesses to add capacity. Meanwhile, tight lending conditions, especially for smaller and medium-sized enterprises, are a constraint for investment. It is also likely that construction investment in a number of countries was hit by bad weather in the first quarter.
Government investment and spending was likely to have been generally limited across the Eurozone in the first quarter of 2013 amid widespread restrictive fiscal policies. It appears that consumer spending was limited overall but varied between countries. Consumer spending drove what little German growth there was, helped by high employment and rising real incomes. However, consumer spending contracted in France and it is highly likely that it also fell in the southern Eurozone countries where consumers are under the most pressure from high and rising unemployment and squeezed purchasing power. French consumers are also suffering markedly from high and rising unemployment and limited purchasing power.
Meanwhile, it looks like net trade provided little overall help to Eurozone economic activity in the first quarter, as exports were limited by muted and stuttering global growth. Net trade was reported essentially flat in Germany as exports and imports both fell quarter-on-quarter, while it was modestly negative in France where exports fell and imports were essentially flat. Some of the southern Eurozone countries are seeing improved net trade performances, though, helped by improved competiveness. In addition, their imports are generally weak as a result of low domestic demand.
GDP had been dragged down in Q4 2012 by widespread weakness
In the fourth quarter of 2012, Eurozone GDP contraction of 0.6% q/q was the consequence of widespread weakness in domestic demand. Consumer spending fell 0.4% q/q, thereby completing a year of declines and causing it to be down by 1.2% y/y. Meanwhile, investment fell by a substantial 1.1% q/q in the fourth quarter, following drops of 0.8–1.7% q/q over the first three quarters. It was therefore down by 4.9% y/y. Business investment was clearly weak in the fourth quarter, while government investment continued to be limited by fiscal consolidation efforts. Austerity efforts in many Eurozone countries also resulted in government spending declining by 0.1% q/q for a third successive quarter in the fourth quarter of 2012. Government spending was down by 0.2% y/y in the fourth quarter.
A modest further running down of inventories contributed 0.1 percentage point to the q/q GDP contraction of 0.6% in the fourth quarter. Inventory adjustments had previously accounted for 0.3 percentage point of the q/q GDP contraction in the third quarter after showing little change over the first half of 2012. This meant that Eurozone domestic demand contracted by 0.5% q/q in the fourth quarter of 2012. This followed declines in domestic demand of 0.4% q/q in the third quarter, 0.6% q/q in the second quarter, and 0.5% q/q in the first quarter.
Completing the disappointing picture in the fourth quarter of 2012, net trade was only flat as Eurozone exports and imports both fell by 0.9% q/q. This was in marked contrast to the first three quarters, when net trade was strongly positive and prevented deeper Eurozone GDP contraction. Muted global growth clearly weighed down on Eurozone exports in the fourth quarter of 2012, while imports were limited by the general weakness of domestic demand.
Outlook and implications
Although Eurozone GDP contraction moderated to just 0.2% q/q in the first quarter of 2013 from 0.6% q/q in the fourth quarter of 2012, it nevertheless marked a record sixth successive quarter of contraction. Furthermore, latest survey evidence for the Eurozone has been largely disappointing, indicating that it is very possible that the Eurozone could see a further small drop in GDP in the second quarter. In particular, weak purchasing managers' surveys for the manufacturing and services sectors in March and April and a widespread relapse in business confidence do not bode well for growth prospects. Restrictive fiscal policy in many countries (despite more time being increasingly allowed for many countries to meet fiscal targets), difficult credit conditions (especially for smaller and medium-sized companies), very high and rising unemployment, generally low earnings growth, and muted and currently stuttering global growth are continuing to hamper Eurozone economic activity. Indeed, the Eurozone unemployment rate stood at a disturbing 12.1% in March 2013.
The main good news for the Eurozone stems from the lift to consumers' purchasing power coming from a recent sharp retreat in consumer price inflation (down to a 38-month low of 1.2% in April). Lower input prices resulting from softer oil and commodity prices are also easing the pressure on companies' margins. Meanwhile, there has been a significant overall easing of the sovereign debt tensions following encouraging policy developments in the latter months of 2012. These most notably included the debt agreement for Greece in November, and, more fundamentally, the European Central Bank (ECB) establishing a programme in September 2012 aimed at limiting risk premia faced by vulnerable Eurozone countries in the bond markets (if specific conditions are satisfied). This has helped bond yields to come down appreciably and has also fuelled a pick-up in Eurozone business and, to a lesser extent, consumer confidence from the October 2012 long-term lows.
Even so, there is still significant uncertainty and concern over the outlook, which is likely to continue to cause businesses to limit their investment and consumers to hold back on their spending. This uncertainty and concern was highlighted by the very difficult and tense process to come up with a rescue package for Cyprus in March, and there could yet be some longer-term fallout from the policymakers' initial botched efforts to deal with the crisis and the final decision to tax large bank deposits (although this was probably the best outcome given the dire alternatives). Worryingly, Eurozone business confidence fell back anew in March and April, although consumer sentiment rose modestly further. Although worries over Greece have faded recently, we suspect that the major problems of Italy and Spain will come increasingly to the forefront in 2013 as investors refocus on their specific and substantial risks. We remain downbeat about Italy and Spain, with no significant q/q growth expected until early 2015. Spain is flirting with depression as it faces extremely high unemployment, still serious banking problems, and the need to rein in the finances of its autonomous regions. Meanwhile, Italy is suffering extended recession, while there are significant doubts over the ability of the new coalition government that was formed in late April to make appreciable progress on much-needed structural reform. Clearly, this poses significant political and social risks, with both Spain and Italy lacking the fiscal muscle to revive their economies while having to pursue relentless austerity despite high and rising unemployment.
Extended GDP contraction in Italy and Spain will obviously weigh down appreciably on the overall Eurozone performance. Thus, although we expect the Eurozone to stop contracting by mid-2013, we suspect that the single-currency area will continue to find overall growth hard to come by for some time to come. As a result, in our May baseline forecast, we project Eurozone GDP to fall by a further 0.7% in 2013 (revised down from an expected drop of 0.6% in the April forecast). Germany is expected to grow by 0.6% in 2013 after expansion of 0.9% in 2012, but French GDP is seen contracting by 0.4% in 2013 having been only flat in 2012 (reflecting the significant structural and competitive problems that it faces). Among the struggling southern periphery Eurozone countries, Italy is seen suffering GDP contraction of 2.0% in 2013 after a drop of 2.4% in 2012, while Spanish GDP contraction is forecast to widen to 2.0% in 2013 from 1.4% in 2012. Portugal is expected to endure a GDP drop of 3.2% in 2013, thereby matching the 2012 contraction. Meanwhile, Greek GDP contraction is forecast to remain substantial at 5.2% in 2013 after a decline of 6.4% in 2012. Eurozone GDP growth is seen improving only gradually overall during 2014, when expansion is forecast at 0.5%. Still restrictive fiscal policy, high unemployment, and persistent weakness in Italy and Spain are expected to continue to limit the upside for Eurozone growth in 2014, while we still have major concerns over the situation in Greece.