Euro Area GDP was almost stable during the second quarter (+0.2% at annual rate) after a slight increase of 0.8% during the first three months of this year. Compared to the second quarter of 2013, GDP is up by 0.7%. Carry-over growth for 2014 is 0.6% at mid-year (Carry-over growth at the end of the second quarter is the average annual growth if GDP level remains at Q2 level in the third and the fourth quarters. It’s a useful approximation)
The first chart shows GDP level at constant price. The red line is the trend calculated from 2000 to the first quarter of 2008 and prolonged until the second quarter of 2014. The gap between the observed GDP and the trend is -12% at the end of the first half of 2014. This is huge and we do not see any convergence between the two lines. It is more a divergence than a convergence. The line in blue is another trend that shows the momentum of the recovery in 2009 and 2010 and the break after the first three months of 2011. There is gain a divergence here. Since the first quarter of 2011, GDP is down by -0.36% (-0.1% at annual rate). The current recovery seen since the first quarter of 2013 is following a mild dynamics. From that date, average growth is 0.8% at annual rate. It is still far from the 1.9% which was the trend growth rate seen before the crisis.
The second graph shows quarterly growth for euro area countries. For the Euro Area, GDP was up by 0.2% after 0.8% in the first three months of 2014. We do not have details to explain this relative stagnation.
In Germany the GDP dropped by -0.6% at annual rate after +2.7% in the first quarter. According to Destatis, exports and investment were down in spring. The lower dynamics in exports can be explained by the lower growth momentum seen in emerging countries (Asia) and in its main trading partners (France, Italy). On investment, there is probably an important seasonal effect. As temperature was high this winter, construction was strong. So part of the sector’s activity took place earlier in the year, weakening spring data. Nevertheless we do not have detailed numbers to have a precise analysis. It is just comments from the national statistics institute (Destatis). Households’ consumption and government expenditures have had positive contributions.
In France, the profile is worrisome for the last four quarters. The trend is close to zero and no impulse is seen (see here)
Italy is in recession again (did it ever leave?). GDP dropped by -0.8% in spring after -0.4% last winter. The detail is not available yet but the national statistics institute (Istat) said that exports were a source of weakness. Internal demand was probably weak also and not being able to counterbalance the exports drop.
In Spain, GDP was up by 2.4% after 1.5% during the first quarter. According to the Bank of Spain, this improvement is due to internal and external impulses. We do not have detail yet on inventories but step by step internal demand is stronger even if its level is still very low.
The rebound seen in the Netherlands is spectacular from -1.5% to +2.2%. But this is not really convincing as internal demand is still contracting rapidly. Investment is contracting at a rapid pace and the small improvement in consumption is not sufficient to counterbalance it. In other words, the Netherlands is still in a deep adjustment process with weak internal demand (negative contribution for the last two quarters (-1.6 and -2.1%) pulling down imports. Net exports have a positive contribution which is mainly due to drop in imports. That’s not really virtuous.
In Portugal GDP were down by -2.2% in the first quarter and up by 2.5% in spring. The Portuguese institute of statistics indicates that this improvement comes mainly from exports. We do not have details. What we know is that contributions to GDP quarterly growth are very volatile. During the first quarter investment was down by 16% and exports by -7.5%. It’s probably a technical effect
In Belgium GDP growth was weaker during spring. It was up by 0.4% versus 1.5% last winter. No details and no comments were available
With the exception of Spain, Euro area figures for the second quarter show more weakness than strength. That’s clearly worrisome.
The third chart represents GDP annual growth and the carry-over for 2014.
2012 an 2013 have been two years of recession for the Euro Area and for important countries such as Italy, Spain, Netherlands and Portugal. But even in Germany and in France the momentum was low. Carry-over for 2014 is weak and does not reflect a strong exit of recession. That’s the weakness of the Euro Area; there is no source of long-lasting positive impulse.
From data of the first quarter and what we know from the second, the source of this low momentum comes from low internal demand specifically on investment. The risk of deflation that can be seen in an inflation rate at 0.4% in July is related to wage negotiations. Low inflation rate will lead to low wage indexation and this will not reinforce consumption and internal demand. That’s why a lot of resources have to be put on investment (public and private).
The fourth graph compares the GDP current level to its pre-crisis level. The reference here is the first half of 2008. To be able to make comparison with the same metrics, the US level is 107 and the United Kingdom is at 100.6. The four leading countries (Germany, Austria, Belgium and France) are still far from the US level but well above UK. Compared to the decrease seen since 2008, rebound seen in Spain and Portugal are still limited. A lot has still to be done. Italy is probably the Euro area country with the weakest momentum (see here). For Greece I have a special graph. But the Greek economy is stabilizing after a drop of almost 25%. The drop is over but the recovery not here yet.