Eurozone Q2 GDP data confirmed that the eurozone’s longest recession (six quarters) to date is finally over. GDP grew by a more-than-expected 0.3% q-o-q, the strongest quarterly expansion since Q1 2011, but this still leaves the level of Eurozone GDP 3% below pre-crisis levels.
The growth was primarily driven by Germany (0.7% q-o-q) and the unexpectedly broad-based growth in France (0.5%). We expect the expansion to continue in the second half and, in Q3 at least, the divergence should narrow with the core slowing but the periphery expected to show further signs of stabilization.
After six consecutive quarters of contraction, eurozone GDP grew by a more-than-expected 0.3% q-o-q (consensus 0.2%), the strongest quarterly expansion since Q1 2011. The growth was primarily driven by Germany (0.7% q-o-q) and the unexpectedly broad-based growth in France (0.5%) but there were also signs of less marked contractions in the periphery, with Italy contracting by “just” 0.2% q-o-q and Spain by a mere 0.1% q-o-q in Q2. Data for much of the periphery are not yet available, except for Portugal which expanded by a remarkable 1.1% q-o-q after ten quarters of contraction, and Cyprus which fell a further 1.4% q-o-q.
Full details will not be available until September 4 but, according to our calculations, consumer and government spending are likely to have grown. Net exports should also have made a small positive contribution as we estimate that exports will have slightly outpaced imports. Investment is expected to have remained the key area of weakness with only German construction expected to have shown any significant expansion in the quarter after a very bad Q1, when construction was hit by very bad weather.
Confirmation that the eurozone’s second recession since 2008 is finally over is welcome but the Q2 expansion of 0.3% q-oq needs to be kept in perspective. It still leaves the level of eurozone GDP 3% below pre-crisis levels. The good news is that the expansion is set to continue in the second half and, in Q3 at least, intra-EU divergence should narrow. German growth is set to slow a little (to quarterly growth rates of 0.3%-0.4% on our existing forecasts) as the industrial expansion continues but the weather-related construction rebound of Q2 fades. We also expect French growth to moderate from the unexpectedly large 0.5% q-o-q rebound in Q2 as energy consumption was boosted by cold weather in Q2 and the negative impact of tax increases is set to increase again in the second half. On the other hand, the periphery should show further signs of stabilisation. We expect growth in Italy to turn slightly positive in the second half.
The risks to our full-year 2013 forecast of -0.6% are now tilted slightly to the upside. We will not be making any explicit revisions to our forecasts until the full details of the Q2 GDP data are published. At this stage we do not consider that the potential upside risks to eurozone growth in 2013-2014 are of a magnitude that will significantly alter our medium-term structural view that government debt burdens in many member states will continue to grow and eurozone inflation will remain under downward pressure.
The Q2 GDP data are likely to increase the ECB’s confidence that the second half recovery is materialising, meaning it is unlikely to use any of its remaining ammunition over the next few months. Nevertheless we still think the ECB will keep the door open to further easing if required. Depending on how markets react to the prospect of Fed tapering later this year, an ECB rate cut could still be an effective way of convincing the markets that the ECB will not be following the Fed to the exit any time soon, should its verbal forward guidance not suffice.