Analysis: Eurozone 4Q GDP Downturn A Prelude For Weak 2012
4Q GDP flash: -0.3% q/q, +0.7% y/y
MNI survey median: -0.4% q/q, +0.7% y/y
MNI survey range: -0.5% to -0.1% q/q
3Q GDP: +0.1% q/q, +1.3% y/y
2Q GDP: +0.2% q/q, +1.6% y/y
1Q GDP: +0.8% q/q, +2.4% y/y
PARIS (MNI) – Eurozone economic activity contracted by 0.3% in 4Q,
slightly less than expected, with declines in most reporting countries,
Eurostat estimated Wednesday. GDP growth in 3Q was revised down 0.1
point to +0.1%
An upside risk to the consensus forecast had become evident with
the release of positive growth for France, where GDP expanded by 0.2% on
the quarter. Germany’s dip of 0.2% was also slightly flatter than most
analysts had feared.
Yet even the setback for the Eurozone’s locomotive could not mask
the divergence between the core bloc and most peripheral countries.
Italy entered recession with a 0.7% GDP drop after -0.2% in 3Q. Spain
limited its GDP decline to 0.3% after no growth in 3Q.
Among the smaller reporting economies, GDP fell in Portugal
(-1.3%), Estonia (-0.8%), the Netherlands (-0.7%), Belgium (-0.2%) and
Austria (-0.1%). There was no growth in Finland and Cyprus, while
Slovakia registered another solid gain (+0.9%).
As usual, Eurostat provided no information on GDP components with
its flash estimate. Eurozone industry output dropped 1.8% in 4Q and
construction activity looks headed for a comparable result, unless mild
temperatures in December brought some relief.
On the expenditure side, private consumption was no doubt throttled
by rising unemployment and fiscal tightening, especially in peripheral
countries. Retail sales fell 0.7% in 4Q and new car sales skidded lower
in many markets.
Exports of goods rose 1.3% in nominal seasonally adjusted terms in
4Q, while imports fell 2.6%. The adjusted trade balance thus swung from
an average deficit of E3.1 billion in 3Q to a surplus of E4.7 billion in
4Q, pointing to support from foreign trade. Net exports contributed
markedly to France’s GDP gain, but dragged down activity in Germany.
Leading indicators for the Eurozone have begun to recover recently,
suggesting that this second setback since the onset of the financial
crisis will be milder than the initial recession. This is clearly the
case in Germany, where analysts and entrepreneurs are regaining
confidence in medium-term prospects.
It is less the case for France, where business sentiment was weaker
at the start of the New Year. Still, the unexpected resilience of growth
in 4Q, buoyed by the aeronautics sector, lends GDP a statistical
headstart of 0.3 point for 2012, which may help offset the headwinds
from rising unemployment and fiscal tightening.
Despite a mild setback in France, the factory PMI for the Eurozone
improved further in January to 48.8, almost emerging from the below-50
contraction zone, where it has been since July. The output component
edged into positive territory (50.4); but the ongoing decline in new
orders (46.5), while flatter than in previous months, points to sluggish
growth at best in the near term.
This is especially true for the third and fourth largest economies,
where the PMIs flagged a further marked contraction in industry output
(47.8 in Italy and 45.8 in Spain) and in new orders (44.8 and 43.4,
respectively), though less than in 4Q.
The European Commission’s business climate index for Eurozone
industry has also been on the mend since December, although its sector
sentiment barometer recovered only marginally in January and remained
slightly below average.
By contrast, the Commission’s services barometer rebounded markedly
in January, while remaining well below average. The services PMI has
regained four points since October, creeping into expansive territory
(50.4) in January. Yet, the further decline in new business (48.7)
highlights the risk of setbacks ahead.
Private consumption, by contrast, could lose steam this year after
a ragged recovery in 2011. Unemployment began mounting again last year
to reach a new record high of 10.4% in November and will continue higher
this year if economic activity stagnates.
Rising taxes and cutbacks in social spending in most countries will
undermine consumers’ purchasing power, while wage gains will be modest
at most outside of Germany. Consumer morale and buying-propensity are
particularly weak, and retailers’ outlook for the coming months has
deteriorated rapidly, the Commission’s surveys show.
Divergences between Germany and its neighbors, on the one hand, and
most peripheral countries, on the other, where fiscal tightening will be
especially severe, are unlikely to subside much, even if German growth
slows markedly to around 1% this year, as widely expected.
Recessions are expected throughout most of the southern flank,
particularly in Portugal and Greece. This will drag down the overall
performance of the euro area, most likely into negative territory.
Last month the IMF slashed its forecast for average Eurozone GDP
growth this year by 1.6 points to -0.2%, citing “the rise in sovereign
yields, the effects of bank deleveraging on the real economy, and the
impact of additional fiscal consolidation.”
If signs of an imminent turnaround in global activity are
confirmed, this could lend some support, particularly in the bailout
countries, where anemic domestic demand and compressed labor costs
should favor export-led growth.
If the second Greek bailout plan is approved and sovereign and
business borrowing costs come down further as a result of renewed market
confidence, the Eurozone economy may fare better than feared.
However, the sovereign debt crisis will continue to smolder,
risking eruption at any shock until governments regain control of their
budgets and structural obstacles to growth are reduced — a process that
will take years and weigh on activity in the meantime.
–Paris newsroom +331 4271 5540; email: email@example.com