Given that the German economy stagnated in Q4 last year it will have come as a relief that GDP growth for the euro-zone as a whole was not revised down from +0.1% q/q. We think that Germany will continue to flirt with recession in the first half of this year and that euro-zone growth will remain very weak.
Germany to continue flirting with recession
- Given that the German economy stagnated in Q4 last year it will have come as a relief that GDP growth for the euro-zone as a whole was not revised down from +0.1% q/q. We think that Germany will continue to flirt with recession in the first half of this year and that euro-zone growth will remain very weak.
- The second estimate of euro-zone GDP in Q4 was unchanged from the first estimate at 0.1% q/q, in line with the consensus forecast. We had anticipated a downward revision to zero since Germany’s economy flat-lined in Q4 and we already knew that GDP contracted in France (-0.1%) and Italy (-0.3%).
- With no more detail on the euro-zone number, the focus today is on the national data. German GDP growth came in below expectations (consensus +0.1%; CE -0.1%) and the press release noted that household and government consumption slowed and that investment in machinery and equipment “was down considerably”. In contrast, Portugal’s economy ended last year on a high. (See Table 1.)
- We think the German economy will continue flirting with recession in the first half of this year. Some business surveys edged up in January, but others – such as the Ifo Business Climate Index – declined. In any case, all of the main surveys are consistent with GDP stagnating at best. (See Chart 1.) And these surveys were collected before China’s economy was hit by the coronavirus, which may shave a little from first-quarter GDP in Germany given its supply-chain links and exports to China.
- The euro-zone labour market continues to be resilient. Indeed, employment increased by 0.3% q/q and 1.0% y/y in Q4, which should help to keep the economy from entering a prolonged recession.
- Nonetheless, prospects for the euro-zone as a whole look poor for this year given the weakness of external demand, softening domestic demand and limited scope for policy support. We have pencilled in a second successive 0.1% quarterly expansion for Q1 and growth of only 0.7% for the year. This is substantially below the consensus and EC forecasts, which are for annual growth of 1.0% and 1.2% respectively.
Chart 1: German GDP & Ifo Business Expectations Index
Sources: Refinitiv, Capital Economics
Table 1: Employment & GDP (% q/q)
Sources: Eurostat, Refinitiv
Andrew Kenningham, Chief Europe Economist, +44 20 7808 4698, email@example.com