By Stephanie Flanders
At the end of last week, Eurostat released the flash estimate for Q1 2014 GDP, which showed the euro area economy expanded at a quarterly rate of +0.2%, and a year-over-year rate of +0.9%. These numbers were below consensus expectations (+0.4% and +1.1% respectively).
They prompted an initial sell-off in some European equities markets, but this proved short-lived, as investors digested the details behind those headline numbers. These paint a decidedly mixed picture, but not one that should cause investors to fundamentally change their views on the eurozone’s recovery.
– The euro area economy expanded at a quarterly rate of 0.2% in the first quarter of 2014, while the broader EU28 expanded at a quarterly rate of 0.3%. This pace of expansion is generally in line with what was observed at the end of 2013, but there were some notable differences at the country level.
– Growth rates in the core of Europe continue to diverge, with the German economy expanding by 0.8% q/q and the French economy seeing no growth in the first quarter due to sluggish consumption and investment. Additionally, there was a significant slowdown in the Netherlands; this may have been caused by an unseasonably mild winter that dragged on natural gas exports, which typically provide a boost to growth during the winter months, but could also be a function of particularly strong growth at the end of 2013.
– Turning to the periphery, Spain saw strong expansion in the first quarter (+0.4%), but growth in Italy turned slightly negative and Portugal saw its economy contract by -0.7%. Growth in Spain is being supported by a recovery in domestic demand and better business investment due to foreign orders for capital goods. Spanish employment has also been rising, much earlier than previously expected.
Investors are probably right to shrug off the disappointments in the data. The big picture is that in most of the eurozone, a gradual – albeit unexciting – recovery continues, with the pace of growth generally in line with market expectations of roughly 1% growth in 2014. That is not fast enough to make a significant dent in unemployment, in most countries, or to start to catch up the ground lost during the crisis in periphery economies. But it is much better than in the previous few years, and probably as much as can be expected, given the structural headwinds impeding growth in many crisis countries, whose job is being made harder by very low rates of inflation.
In an effort to offset these disinflationary pressures and stem the rise of the euro, the European Central Bank (ECB) has indicated that it is likely to ease policy further at its June meeting. Many are expecting this to involve a further cut in both the refinancing and deposit rates. We doubt that either step will bring a fundamental change in either the inflation outlook or the currency. But it is probably a necessary first step in the direction of more dramatic policy action in the form of private or public asset purchases – or quantitative easing. We believe that this option is now firmly on the table, but the hurdle for such a step remains quite high, with many ECB officials not only philosophically opposed to buying eurozone government debt but also doubtful whether it can make a meaningful difference to the underlying structural problems which caused the crisis in the first place.
Stephanie Flanders is chief market strategist for the UK and Europe at JP Morgan Asset Management
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