Thursday, May 12, 2005

European GDP Numbers

Provisional GDP numbers for eurozone countries in the first quarter are out today. The German economy surprisingly bounces back, whilst Italy is now officially in recession after two quarters of contraction. Also worthy of note is that the Dutch economy contracted slightly in the first quarter, which may have some implications for the forthcoming constitution referendum there.

The noteworthy point about the German expansion is that it almost entirely export driven, and hence dependent on growth elsewhere. This evidently raises questions about sustainability in the coming quarters:

"Germany?s news was a positive surprise from an economy that has been performing below par for a decade but the real problem, the fact that consumer spending fails to match whatever thrust the economy gets from exporting, lingered on.

The statistics office said domestic demand actually fell and that the first quarter GDP rise was due exclusively to exports -- which remain vulnerable if the euro stays strong and oil prices high or world trade and foreign demand slows."
Source: Financial Times

Meantime things in Italy only seem to get worse. Gross domestic product shrank 0.5 percent in the first quarter, the steepest drop in six years, and this follows a contraction of 0.4 percent in the previous three months.:

"Italian industrial production, which accounts for about a third of the economy, dropped 0.6 percent in March, Istat said today, resulting in the third straight quarterly decline. Business confidence in April fell to the lowest in almost two years, according to a survey compiled by the Rome-based Isae institute.

There are few signs that the income-tax reductions worth 6 billion euros ($7.7 billion) are boosting consumer confidence and spending. Retail sales in Italy, fell for a ninth month in April, the Bloomberg purchasing managers index showed May 9."
Source: Bloomberg


Quotes of the day:

As member of the eurozone Italy cannot cut interest rates or devalue its currency as it has in previous significant downswings. The depth of the Italian recession ?is a whole new ball game, we don't have any precedent for dealing with this,? said Julian Callow, economist at Barclays Capital.


The federal statistics office (Germany) said that the improvement ?was exclusively based on exports?. Holger Schmieding, economist at Bank of America, added that leading indicators also suggested that German growth may retreat back to near-stagnation in the next few months. ?Although Germany may finally pass the sorry title of 'sick man of Europe' on to Italy, the German data do not change our overall outlook for Germany's future growth profile.?

Both these quotes come from this FT article.

Update 2

The FT Deutschland is reporting that pressure on the European Central Bank to consider an interest rate cut is expected to come next week from the OECD.

According to FT Deutschland a draft OECD report says ECB interest rates should be kept on hold while the indicators remain mixed, but if the ECB's economic assessment moves clearly in either direction, monetary policy should react. The OECD has also revised down its forecasts for growth this year to 1 per cent in Germany and 1.6 per cent in the eurozone, compared with the 1.4 per cent and 1.9 per cent forecast in November.

In other words if the downside risks continue, arguments for cutting the rate will mount up. This will be a real first for the ECB, and the first major test of the euro, since monetary policy has been, to date, relatively uncontroversial. Keep watching this space.

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