Euro Area: GDP growth unfazed by political developments in Q3
November 23, 2016
The Eurozone economy shrugged off any early Brexit contagion in Q3 as GDP growth remained steady. The common currency bloc grew 0.3% in Q3 over the previous period, unchanged from Q2’s result, according to a preliminary estimate by Eurostat. While a breakdown by components is not yet available, the economy’s growth story likely remained the same as previously, with GDP growth supported by solid domestic demand in the face of a subdued external sector. The unemployment rate continued on a downward trend in Q3 and ultra-loose monetary conditions in a context of muted price pressures likely boosted consumption.
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Looking at the economies within the region, divergent growth patterns were seen with periphery economies recording some of the strongest gains. France’s economy rebounded, Italy’s economy picked up steam and Greece’s growth surged in the third quarter. On the other hand, Germany’s growth slumped on a weak external sector and growth in Belgium lost momentum. Spain’s GDP expansion also lost pace, although the country remains among the top performers in the Eurozone.
At the moment, data is sparse for Q4 but early indicators suggest that the economy remains on an even footing. The Eurozone economy has shown resilience in the face of heightened uncertainty and the FocusEconomics panel expects this to continue, foreseeing GDP growth remaining steady, albeit lackluster, at 0.3% over the previous quarter.
Meanwhile, the political arena remains confusing and convoluted. The surprise election of Donald Trump in the U.S. reverberated through European markets and pushed the euro to the lowest level in nearly a year in November. The implications of his election are hard to decipher at this moment, as Trump flip-flopped on many issues and made a number of highly controversial statements, making it hard to separate the policies he will pursue from election rhetoric. A less open U.S. economy could weigh further on the Eurozone’s already weak external sector. The Brexit saga has also taken an unexpected turn in recent weeks after the UK’s High Court ruled that the government needs parliamentary approval to start negotiations with the European Union. The decision has brought the timing of the UK’s triggering of Article 50 into question and it is unclear how and when negotiations will proceed.
In addition, Italy is at risk of a political shakeup. Polls point to an edge for the ‘no’ camp in 4 December’s constitutional referendum, although a large percentage of voters remain undecided, and Prime Minister Matteo Renzi has stated that he will resign if the reform fails. A ‘no’ vote would be a substantial blow to Renzi and would likely lead to policy paralysis in the near-term, although it would not necessarily lead to early elections or a new government.
Looking into 2017, the Eurozone faces a jam-packed election calendar and the uncertain atmosphere is likely to persist. France, Germany and the Netherlands are all facing general elections and the rising momentum of anti-establishment parties is threatening to unseat mainstream leaders. Apart from these elections, Brexit negotiations will continue to dominate the political discourse and all of these events will test the resilience of the Eurozone’s recovery
Growth to moderate in 2017
The Eurozone economy is expected to lose steam next year after an expected growth rate of 1.6% in 2016. A reduction in tailwinds to domestic demand as inflation rises, combined with the political uncertain atmosphere, should limit the speed of growth and our panel sees GDP expanding 1.4% in 2017, which is unchanged from last month forecast. Moreover, downside risks remain high in light of the Trump presidency and likely volatile Brexit negotiations.
Looking at the individual countries in the region, the vast majority of the analysts we polled saw no change to their outlook for 2017 and this month forecasts for France, Germany, Italy and Spain, among others were held unchanged. Austria, Greece and Malta saw upward revisions this month, while Ireland, Latvia and Lithuania were downgraded. Ireland remains one of the countries most at risk of negative spillover effects of a “hard” Brexit in the Eurozone.
GERMANY | Economy slows in Q3
The German economy slowed down in the third quarter more abruptly than analysts had expected. Lead indicators had previously suggested a relatively stable pace of growth in Q3, but GDP growth averaged 0.2% from the previous quarter, below the 0.4% registered in Q2. According to the statistics institute, the deceleration was due to a negative net trade contribution, a likely result of heightened global uncertainty. Investment remained a soft spot, while private and government consumption continued to grow steadily. On the political front, the leaders of the three government parties agreed on Foreign Minister Frank-Walter Steinmeier to replace Joachim Gauck as President early next year. The German presidency is a largely ceremonial role but is seen as providing moral authority in Germany’s public discourse, setting the scope for debate.
GDP growth is expected to slow next year as the uncertain global environment weighs on Germany’s external sector, one of its main growth engines. Domestic demand should remain robust on the back of a tight labor market and wage growth. Our panel expects GDP to grow 1.8% this year and 1.4% in 2017, which is unchanged from last month’s forecast.
FRANCE | Candidates begin to emerge for 2017 vote
The French economy is struggling to escape the cycle of modest growth. In Q3, the economy recovered from Q2’s contraction but growth disappointed and forced the government to finally admit that its 1.5% growth target for this year will be difficult to achieve. The news, coupled with latest disappointing unemployment data from Q3, is a setback for President François Hollande, who is expected to announce his presidential bid next month. As the embattled president is considering his next move, the French political landscape is taking shape. Emmanuel Macron, Hollande’s former economic minister, launched his candidature as an independent while former Prime Minister François Fillon won the first round of the centre-right Les Républicains party primaries on 20 November. Fillon will face former Prime Minister Alain Juppé in the runoff vote after ex-President Nicolas Sarkozy was defeated in the polls.
Analysts participating in the FocusEconomics Consensus forecast expect the economy to expand 1.3% in 2016 before decelerating slightly in 2017 on weakening domestic demand. Heightened volatility abroad and growing uncertainty about the outcome of next year’s presidential election pose downside risks to growth. Panelists participating in the FocusEconomics Consensus expect the economy to grow 1.2% in 2017, which is unchanged from last month’s forecast.
ITALY | GDP figure overshoots expectations
Italy’s third quarter GDP surprised on the upside, as the economy grew faster than expected by the markets and accelerated from the previous quarter, on the back of expanding domestic demand. Nevertheless, growth remained weak overall and there are signs that the economy could be slowing in Q4. In October, consumer confidence declined for the third consecutive month, following a downward trend that began at the beginning of the year. In the same month, the Purchasing Managers’ Index inched down, on the back of a weaker expansion in output and new orders, while economic sentiment improved. On 4 December, Italians will go to the polls to vote on the constitutional referendum promoted by Prime Minister Matteo Renzi. The outcome of the vote may decide the fate of the government.
Next year, Italy’s economic growth should remain steady, broadly mirroring this year’s subdued performance, as a stronger external sector is expected to offset weakening domestic demand. A surge in interest rates and financial instability, resulting from internal or external shocks, and a slowdown in the EU economy represent the main downside risks to growth. Analysts expect the Italian economy to expand 0.8% this year. For 2017, the panel also sees growth of 0.8%, which is unchanged from last month’s forecast.
SPAIN | New weak government faces reform challenges
Spain’s economy maintained strong momentum in the third quarter. According to a preliminary estimate, GDP expanded a seasonally-adjusted 0.7% from the previous quarter, which was down a notch from Q2’s 0.8%. As in previous quarters, Spanish households likely benefited from an upbeat labor market data, with unemployment falling to its lowest level in six years in the third quarter. Domestic demand also continued to receive support from the ECB’s accommodative monetary policy and the lack of severe austerity measures for 2016. The latter is the result of 10 months of political impasse in Spain, which came to an end after Mariano Rajoy was reappointed Prime Minister on 29 October as head of a minority government. Although the new executive faces the task of having to drastically reduce the fiscal deficit by 2017, on 16 November the EC decided not to suspend EU funds to Spain—EUR 1.2 billion—for breaching EU budget rules in the past, which will provide the government with more room for fiscal maneuvering.
Economic activity in 2016 has showed strong dynamism on the back of beneficial financing conditions, subdued inflation and increasing employment. Our panelists expect the economy to grow 3.1% in 2016. As 2016’s tailwinds gradually dissipate, Spain’s economic momentum will moderate next year, with households suffering from wage stagnation and higher prices and the government renewing its commitment to fiscal restraint. For 2017, the panel sees growth easing to 2.2%, which is unchanged from last month’s estimate.
INFLATION | Inflation hits over two-year high in October
Harmonized inflation came in at 0.5% in October, which was above September’s 0.4% and marked the highest reading since April 2014. Inflation has climbed in the past two months as the effect of low energy prices beings to dissipate. However, it remains in what ECB President Mario Draghi has called the “danger zone” of below 1.0% due to low oil prices and economic slack.
Price pressures are expected to pick up next year after inflation is seen averaging 0.2% in 2016. Next year, our panelists see harmonized inflation of 1.3%, which is unchanged from last month’s forecast. The higher print will be driven by the diminished impact of low energy prices, while economic slack continues to limit price pressures.
Written by: Angela Bouzanis, Senior Economist