RaboResearch - Economisch Onderzoek

Eurozone’s growth disappoints in 12Q4

Economisch commentaar


The eurozone GDP contracted by 0.6% q-o-q in the final quarter of 2012. Sentiment indicators suggest the economy will fare better in 13Q1, but we do not expect growth to pick up strongly in 2013 amid severe economic headwinds.

In the last quarter of 2012, eurozone GDP contracted by a slightly larger-than-expected 0.6% q-o-q, after falling 0.1% in the previous quarter. This means that for 2012 as a whole, GDP contracted by 0.5%. Unsurprisingly, the Southern European economies continued to experience the largest contraction. What was somewhat surprising, however, was that Germany and France saw bigger than expected contractions of 0.6% and 0.3%, respectively. Dutch GDP fell much less sharply than in the previous quarter (see Rabo Macro Comment 13/02 for more details on the Netherlands). Looking at preliminary data for the expenditure breakdown, we see that private consumption acted as a drag on growth in Spain and the Netherlands. Meanwhile, the negative contribution of net trade and fixed investment was the main reason for Germany’s economic slowdown. Falling fixed investment also contributed to France’s GDP contraction.

Figure 1: Eurozone growth

Figure 1: Eurozone growth

Source: Reuters EcoWin

Of course, 12Q4’s figures are to some extent outdated and more timely survey indicators are pointing to an improvement in activity in the early part of 2013. The Eurozone composite PMI picked up over the past few months, indicating that the economy is likely to fare better in 13Q1 (figure 2). However, it is worth noting that the PMI is still consistent with a contraction of GDP. What’s more, the multi-speed recovery in the region remains firmly intact. The Economic Sentiment Indicators (ESI) produced by the European Commission show that producer and consumer sentiment is improving in most eurozone countries, but at varying speeds (figure 3). Broadly speaking, the pace of recovery in the periphery countries lags behind that of the core economies.

Figure 2: Quarterly GDP growth vs PMI
Figure 2: Quarterly GDP growth vs PMIBron: Reuters EcoWin
Figure 3: Economic sentiment indicators
Figure 3: Economic sentiment indicatorsBron: Reuters EcoWin

Going forward, we do not expect eurozone growth to pick up materially in 2013 given a number of severe headwinds. First, fiscal consolidation will continue to weigh on activity this year as countries strive to lower their deficits. Second, households are unlikely to go on a spending spree while facing higher job/income insecurity as well as tighter credit conditions. The latter will also hamper firms from increasing investment. Third, the broader uncertainty regarding the debt crisis, even if it is currently in a less acute phase, will caution households and businesses from increasing their spending.

The weak economic backdrop indicates that it is up to the export sector to bolster growth. Positive signs stem from the growth pick up in the emerging countries, especially China. And US’s recovery is probably going to gain further momentum in the second half of this year if Democrats and Republicans find common ground. That said, the recent appreciation of the euro thanks, in part, to Mr. Draghi’s pledge to do “whatever it takes” to preserve the monetary union is an extra headwind for eurozone exporters. The currency’s appreciation on a trade-weighted basis is resulting in a tightening of financial conditions at the data edge (figure 4). The further appreciation of the euro will, therefore, act as an extra drag on growth.

Figure 4: Financial conditions

Figure 4: Financial conditions

Source: Reuters EcoWin, Rabobank

The disappointing GDP figure serves as a timely reminder that the current fiscal consolidation programmes are hurting growth. Against this backdrop, we believe the European Commission must give all euro members extra time to reach their ambitious deficit targets. This flexibility is embedded in the Article 3(5) of Regulation (EC) 1467/97 of the Council of the European Union, which reads “[i]n the case of a severe economic downturn in the euro area or in the Union as a whole, the Council may also decide, on a recommendation from the Commission, to adopt a revised recommendation under Article 126(7) TFEU provided that this does not endanger fiscal sustainability in the medium term”. Implementing more austerity measures in such a weak economic environment will further undermine fiscal sustainability as it worsens growth prospects, especially in the periphery countries.

Maartje Wijffelaars
RaboResearch Global Economics & Markets Rabobank KEO
030 21 68740

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