Eurozone: Domestic downturn hits growth in Q2
September 6, 2016
The third estimate of GDP released by Eurostat confirmed that growth nearly halved in the Eurozone in the second quarter. GDP increased a seasonally-adjusted 0.3% in Q2 over the previous quarter, which was unchanged from the first and second preliminary estimates. The result is below Q1’s revised 0.5% expansion (previously reported: +0.6% quarter-on-quarter) and marked the slowest growth rate since Q2 2014. A poor performance by the domestic economy—which has driven the recovery so far—was behind the downturn, while exports boosted GDP.
After a strong performance in the first quarter, a broad-based slowdown hit the domestic economy. However, the result was partly due to base effects as Q1 benefitted from the early timing of Easter and a milder winter. In addition, gains from low oil prices began to fade causing consumer spending to lose steam. Private consumption growth fell from 0.6% in Q1 to 0.2%, the worst reading since Q1 2014. Public spending also moderated, growing a meagre 0.1% (Q1: +0.6% qoq) and inventories dragged on economic activity. On top of this, fixed investment stalled, recording zero growth in Q2 (Q1: +0.4% qoq). Despite the ultra-low interest rate environment, investment has been a weak spot in the Eurozone’s recovery. Moreover, the Brexit-induced rise in uncertainty at the end of the second quarter bodes poorly for a strong recovery in H2.
The external sector was a bright spot in the GDP data as strong sales of services drove exports to rise 1.1% in Q2 (Q1: 0.0% qoq), the best reading in one year. Meanwhile, imports swung from a 0.1% contraction in Q1 to a 0.4% expansion in Q2, taking a bit of steam out of net exports. Overall, the external sector contributed 0.4 percentage points to GDP, up from Q1’s 0.1 percentage point. However, it is unlikely that the momentum will be maintained going forward given the expected sharp slowdown in the UK—one of the Eurozone’s main trading partners—and an overall weak outlook for global trade.
On an annual basis, GDP growth inched down from Q1’s 1.7% to 1.6%. Despite the slowdown in the second quarter, many of the conditions that have driven the Eurozone recovery so far remain in place. An improving labor market, a low interest rate environment and less austere fiscal position should continue to support growth in H2. However, clouds loom over the outlook largely due to Brexit-related uncertainty and a number of political risks in member nations.