The Eurozone's recession eased substantially in the second quarter, as GDP contracted by a much-reduced 0.1% quarter-on-quarter (q/q), according to a "flash" estimate from Eurostat. This followed record Eurozone GDP contraction of 2.5% q/q in the first quarter and another hefty drop of 1.8% q/q in the fourth quarter of 2008. However, the second quarter of 2009 was still the fifth successive quarter of Eurozone contraction as GDP had also fallen by 0.4% q/q in the third quarter of 2008 and by 0.3% q/q in the second. Furthermore, the year-on-year (y/y) decline in Eurozone GDP was still a dismal 4.6% in the second quarter of 2009, compared with 4.9% in the first.

All Eurozone Countries Saw Improved Performance in Q2, Led by Germany and France

All of the Eurozone countries that have released their second-quarter GDP data saw a markedly improved GDP performance during the period. The turnaround was most pronounced in Germany, which moved out of recession as real GDP expanded by 0.3% q/q, the first rise since the first quarter of 2008. This was in marked contrast to the 3.5% q/q plunge suffered in the first quarter of 2009. This had been the sharpest drop since German reunification in 1990 and was primarily the consequence of plunging exports as world trade collapsed in late 2008/early 2009. Despite the improvement between the first and second quarters, real GDP was still down by 5.9% y/y, compared with a 6.7% y/y fall in the previous quarter. Meanwhile, the French economy also emerged from recession, with real GDP growing by 0.3% q/q in the second quarter after having fallen continuously from early 2008. However, French GDP was still down by 2.6% y/y in the second quarter. There was also a very marked slowdown in the rate of Italian contraction in the second quarter, as GDP fell by 0.5% q/q, compared with a drop of 2.7% q/q in the first quarter. The y/y decline in Italian GDP was stable at 6.0%. The Italian economy started to contract in the second quarter of 2008.

Spanish GDP contraction appeared to be around 1.0% q/q in the second quarter of 2009, but this is at least down from 1.9% q/q in the first quarter as the rate of decline was limited by the government's stimulative measures. These included major infrastructure spending as the government sought to support the slumping construction sector. This was the fourth successive quarter of contraction, with the y/y decline of an estimated 4.1% the deepest since the GDP series started in 1970. Dutch recession moderated substantially in the second quarter as GDP fell by 0.9% q/q after plummeting by 2.7% q/q in the first quarter. This was a fifth successive quarter of contraction, with GDP down by 5.1% y/y.

Elsewhere, Belgian GDP narrowed to 0.4% q/q in the second quarter of 2009 from 1.7% q/q in both the first quarter of 2009 and the fourth quarter of 2008. However, the y/y decline widened to 3.8%, reflecting the fact that the Belgian economy only started contracting in the fourth quarter of last year. Meanwhile, Greek GDP grew by 0.3% q/q in the second quarter after declining by 1.2% q/q in the first quarter. This meant that Greece technically avoided recession as the first quarter was the only quarter of q/q contraction. Nevertheless, Greek GDP was down 0.2% y/y in the second quarter.

Positive Boost from Net Trade Likely to Have Limited GDP Contraction in Q2

Eurostat is yet to release a component breakdown of Eurozone GDP in the second quarter of 2009. Nevertheless, it is likely that net trade helped to shore up Eurozone economic activity in the second quarter as foreign demand for Eurozone goods showed signs of stabilising. Eurozone consumer spending may also have contracted at a reduced rate in the second quarter after falling 0.5% q/q in the first quarter given that the drop in Eurozone retail sales volumes more than halved to 0.4% q/q from 0.9% q/q in the first quarter. However, it seems likely that Eurozone investment saw further marked contraction in the second quarter after plunging by 4.1% q/q in the first as businesses faced muted demand, weakening capacity utilisation, very tight credit conditions, and deteriorating profitability. It is likely that inventories were run down at a significantly reduced pace after contributing 0.9 percentage point to the first-quarter GDP contraction of 2.5% q/q. However, France and Germany reported that inventory changes continued to make a negative contribution in the second quarter.

It is evident that a positive boost from net trade was a key factor behind the slower rate of second-quarter Eurozone GDP contraction, as imports fared worse than exports. This was particularly true in Germany, France, and the Netherlands, whose economies had been hammered by the decline in world trade. Evidence from Germany, France, and the Netherlands also reveals sharp contractions in business investment, which is consistent with firms facing slumping demand, weakening capacity utilisation, very tight credit conditions, and deteriorating profitability. In addition, it is also very possible that Eurozone consumer spending steadied in the second quarter, with both Germany and France reporting a small rise in household expenditure. Sharply reduced inflation has boosted consumers' purchasing power across the Eurozone, although this is being countered by sharply rising unemployment and increasing downward pressure on wages.

Outlook and Implications

The latest Eurozone data and survey evidence show ongoing overall improvement, thereby raising hopes that the economy could essentially stabilise in the second half of the year. In particular, the composite indicator for the Eurozone purchasing managers' manufacturing and service-sector surveys rose for a fifth successive month in July to an 11-month high of 47.0. This was up from 44.6 in June and a record low of 36.2 in February, although it was still appreciably below the 50.0 level that indicates unchanged activity. The survey showed manufacturing activity contracting at the slowest rate for 11 months in July, while service-sector activity declined at its weakest rate for 9 months. Meanwhile, overall Eurozone economic sentiment rose for a fourth successive month in July to an eight-month high, with both consumer and business confidence improving significantly overall. It should be borne in mind though that this was from an extremely depressed base as overall economic sentiment in the Eurozone had been at its lowest level in March since the European Commission's survey started in 1985.

However, other latest available data show that consumer spending appears to remain muted across the region. Indeed, Eurozone retail sales volumes fell by 0.2% m/m and 2.4% y/y in June and were also down by 0.4% on a three-month/three-month basis. Eurozone industrial production disappointingly relapsed by 0.6% m/m in June after rising by 0.6% m/m in May, which had been the first increase for nine months. Production was down by 17.0% y/y in June and by 3.0% on a three-month/three-month basis. In addition, Eurozone industrial orders continued to fall in May, by 0.2% m/m and 30.1% y/y. Orders also contracted by 1.9% on a three-month/three-month basis.

Eurozone economic activity increasingly seems to be responding to the monetary and fiscal stimulus measures that have been enacted, while much of the required inventory adjustment resulting from sharply weakened demand in late 2008/early 2009 now appears to have been completed. In addition, there are signs that foreign orders for Eurozone products are now stabilising. Measures to support Eurozone financial sectors, sharply lower oil and commodity prices compared with their mid-2008 peak levels, and a retreat in the euro from its July 2008 peak level of 1 euro:US$1.604 are also helping matters.

However, although the latest data and survey evidence have raised hopes and expectations that Eurozone economic activity will stop contracting in the second half of 2009, serious obstacles remain to sustainable recovery. Financial sector problems are far from solved, with the result that credit conditions remain very tight across the Eurozone and are still hampering economic activity. Worryingly, unemployment has increased sharply across the Eurozone and seems certain to rise substantially further, thereby countering the boost to purchasing power coming from current mild deflation. Meanwhile, global economic activity is still relatively weak and this is limiting the upside for Eurozone exports, while the region's exporters will also be perturbed to see the euro rising from a low of 1 euro:US$1.25 earlier in 2009 to trade as high as 1 euro:US$1.44 in early August. In addition, oil prices have firmed from US$40/barrel early in 2009 to as high as US$70/barrel recently. Finally, significant corrections in overvalued housing markets are still weighing down on overall economic activity in some countries, most notably Spain and Ireland.

Consequently, IHS Global Insight suspects that Eurozone economic activity will be essentially flat in the second half of 2009, before growth gradually develops in 2010. As a result, in our August detailed quarterly and monthly forecasts, we project that Eurozone GDP will contract by 4.3% in 2009, with all of the major Eurozone economies enduring serious GDP declines: Germany (5.3%), France (2.9%), Italy (5.2%), Spain (3.9%), and the Netherlands (3.8%). Eurozone GDP is seen rising by 0.5% overall in 2010, led by expansion of 1.2% in Germany. France and the Netherlands are both projected to grow by 0.7%, while Italy is seen expanding by 0.4%. However, further contraction is seen in Spain (1.1%).

Global Insight (Reino Unido)