Euro Area: Downbeat data suggests soft start to 2018
May 2, 2018
A string of weaker economic data suggests that the Eurozone economy decelerated at the start of 2018, following a robust spell of growth last year. While GDP data for the first quarter is still outstanding, monthly indicators have been soft, with economic sentiment falling throughout the quarter, and industrial production dropping in January and February. That said, the tailwinds of last year’s solid growth remain largely in place, and the slowdown is likely to be moderate thanks to a tightening labor market and ultra-accommodative monetary policy. FocusEconomics analysts expect GDP to have expanded a seasonally-adjusted 0.5% over the previous quarter in Q1, down from Q4’s 0.7% expansion.
Preliminary GDP data released by national statistical institutes revealed that growth waned in Austria, Belgium and France. In France, a weak performance by the external sector and a sharp slowdown in corporate investment dented momentum in the quarter. While subdued domestic activity likely sparked the slowdown in Belgium, the details behind the release are still outstanding. Although Austria’s economy decelerated somewhat, growth was still strong by historical standards, bolstered by both domestic demand and the external sector. Meanwhile, Spain expanded at a solid rate, clocking a third consecutive quarter of steady growth. First-quarter GDP data for the remaining economies is still outstanding.
The political landscape in the common currency bloc remains uncertain and convoluted, casting a shadow on its future. Italy is in a state of political deadlock after the March election yielded a fragmented congress, and it remains to be seen when or if a government will be formed. Moreover, it seems unlikely that a new government will have the political willpower or ability to push tough economic reforms, which could limit the economy to growing at a subdued rate.
In Slovenia, early elections were called for 3 June on 14 April, following Prime Minister Miro Cerar’s resignation. Early polls place the center-left List of Marjan Sarec (LMS) in the lead; this is the first time LMS is running in a national vote. However, uncertainty is high, and the race is close, making it difficult to call. Meanwhile, Greece presented its post-bailout vision to Eurozone members on 27 April as it enters the final stretch of its third bailout program. The program is set to expire in August, and the country is eager to acquire debt relief and take control over its economic policy; however, there are fears among Euro officials that Greece could backslide on reforms or fiscal consolidation once the bailout ends. Negotiations over an exit package are expected to continue in the coming weeks.
Eurozone’s growth outlook cut after six consecutive upgrades
FocusEconomics panelists downgraded the Eurozone’s 2018 GDP forecast this month after a stream of six consecutive upgrades, marking the first downward revision since September 2016. The slew of weaker-than-expected data for the first quarter fueled the cut as the economy appears to have started 2018 on a soft footing.
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That said, growth is set to remain healthy overall thanks to improving labor markets, accommodative monetary policy and high economic sentiment. A strong euro, however, will likely take a bite out of exports, while the uncertain political scene is complicating the outlook. FocusEconomics panelists now see the Eurozone growing 2.3% in 2018, down a notch from last month’s forecast. Next year, GDP is seen growing 2.0%.
This month, six of the Euro area economies saw their growth projections cut, including Greece, Italy and the Netherlands. In contrast, five economies saw their prospects lifted, while eight experienced no changes to their forecasts. Ireland’s growth projection was upgraded a notable 0.9 percentage points after a much better-than-expected 2017 GDP result. The remaining of the region’s major players—France, Germany and Spain—saw no changes to their outlooks.
Ireland and Malta are forecast to be the fastest-growing economies in the region this year, expanding 5.3% and 4.5%, respectively. Conversely, Italy will be the region’s slowest economy, expanding a tepid 1.4%. Regarding the other major economies in the region, Spain will outperform the rest, with a 2.7% expansion. Germany’s GDP is seen increasing 2.4%, followed by France’s with 2.1% growth.
GERMANY | Economy loses steam in Q1
Signs are emerging that last year’s strong economic momentum waned somewhat in the first quarter of this year. Industrial production weakened in February due to a sizable contraction in manufacturing output, following a disappointing start to the year. Meanwhile, business confidence continued to moderate on the back of less favorable business expectations. On a more positive note, the composite PMI increased slightly in April on the back of improvements in the services sector, and consumer confidence remained elevated throughout the first quarter. Consumer sentiment is underpinned by record low levels of unemployment, reinforcing private consumption; annual growth in retail sales is expected to have picked up pace in the first quarter. A moderation in economic activity is therefore expected to be temporary.
Both private expenditure and government expenditure are expected to remain resilient this year on the back of the government’s proposed fiscal stimulus package. Household consumption should further benefit from strong wage increases, as evidenced by recent wage settlements in the industrial and private sector. Furthermore, fixed investment and external demand should remain resilient, although downside risks to external demand remain present; the strong euro and rising protectionism in the U.S. and a possible escalation of trade tensions between the U.S. and China could affect export growth. Analysts see GDP expanding 2.4% in 2018, unchanged from last month’s estimate, and 2.0% in 2019.
FRANCE | Macron pursues fiscal consolidation despite public opposition to reforms
A preliminary GDP estimate shows that the economy decelerated in the first quarter, dragged down by a sluggish growth in private consumption and a deceleration in fixed investment. Despite the moderation, France’s macroeconomic fundamentals remain in good shape, with unemployment in February resting at multi-year lows, and survey-based indicators including consumer confidence and the manufacturing PMI resting above their respective long-term averages in April. On 11 April, the government unveiled its 2018–2022 Stability Program, laying out fiscal consolidation plans for the upcoming five years. The document envisages reducing the fiscal deficit and lowering public debt by implementing deep-seated reforms in pensions, unemployment benefits and public service. Reforms in these areas will follow ongoing efforts to overhaul the debt-ridden state-run train operator SNCF. On 17 April, the National Assembly approved the SNCF reform bill despite strong opposition and days of far-reaching rolling strikes.
Low unemployment, a strong euro and accommodative monetary conditions in the Euro area are expected to support buoyant growth in private consumption and fixed investment in 2018. Disruptive strikes could, however, weigh on economic activity in the second quarter of the year. Panelists participating in the FocusEconomics Consensus Forecast expect GDP to grow 2.1% in 2018, which is unchanged from last month’s forecast. For 2019, the panel sees growth of 1.9%.
ITALY | Soft data rolls in, while political stalemate continues
The political situation is still unsettled nearly two months after general elections. Talks to form a government are ongoing, and no clear solution is in sight. In April, President Sergio Mattarella appointed two mediators to explore the possibility of forming a parliamentary majority to support a government; while the first mediator failed, the negotiations sponsored by the second mediator are still ongoing. Adding to the troubled political scenario, incoming data shows the economy likely decelerated in the first quarter, and survey-based indicators suggest weakness carried over into the second quarter. In the first two months of the year, the industrial sector weakened, in line with what was seen across the Eurozone. Moreover, retail sales declined, suggesting consumer spending moderated. However, the stock of non-performing loans declined further in February, reaching the lowest level since June 2012, a sign that the banking sector is slowly healing. Additionally, in the same month corporate credit continued to expand, suggesting a recovery in lending, although modest, is firming up.
As the formation of a fiscally irresponsible government is still a possibility, downside risks to the stability of public finances persist. That said, the economy should continue its sluggish recovery this year, helped by gradually improving conditions in the banking sector, employment gains and business investment. FocusEconomics analysts project growth of 1.4% in 2018, down 0.1 percentage points from last month’s forecast, and 1.3% in 2019.
SPAIN | Overdue budget appears finally set to be passed
Nearly a month after unveiling its long-delayed 2018 budget, Spain’s minority government seems to have finally obtained enough support in Congress to see the bill through. The budget—with a final vote slated for lcate May—is slightly expansionary and includes measures aimed at shoring up public support for the ruling party, which has floundered in recent months. That said, authorities remain committed to reducing the fiscal deficit, which will be mainly accomplished through lower unemployment benefits and a smaller interest burden. Political wrangling over the 2018 budget is taking place against a backdrop of solid economic momentum, with most leading indicators suggesting growth was resilient in the first quarter of the year. Survey-based business data was healthy throughout the quarter, while job creation growth—as measured by Social Security affiliations—was robust in the months up to March.
A pick-up in credit growth, low borrowing costs and strong employment gains should buttress household spending this year. Similarly, an upbeat outlook for the domestic economy and relatively robust momentum in the Eurozone are expected to support fixed investment this year, especially in equipment and machinery. Export-oriented sectors should also continue reaping the benefits of increased competitiveness this year, a trend that could, however, be bucked by the rising threat of global protectionism. Our panel sees growth at 2.7% this year, unchanged from last month’s estimate. For 2019, our panelists sees growth of 2.3%.
MONETARY SECTOR | Inflation rises in March
Comprehensive data confirmed that harmonized inflation rose in March but remained below the ECB’s target of just under 2.0%. Inflation increased from February’s 1.1% to 1.3%. The early timing of Easter led prices for services to rise in March. However, overall underlying price pressures remained weak, partly due to a strong euro.
In the face of weak inflation and a slew of soft 2018 data, the European Central Bank (ECB) did not deliver any surprises at its 26 April monetary policy meeting, leaving its ultra-accommodative monetary policy stance unchanged and refraining from offering any clues on the future of its bond-buying program after September. The meeting was uneventful overall, with the Bank’s forward guidance unchanged.
The FocusEconomics panel sees inflation remaining below the ECB’s target and averaging 1.5% in 2018, unchanged from last month’s forecast. For 2019, inflation is seen rising slightly, to 1.6%.
Written by: Angela Bouzanis, Senior Economist