Despite the return to growth in the second half of 2009, Eurozone GDP contracted by 4.1% over the year as a whole. GDP was still down 2.1% year-on-year (y/y) in the fourth quarter, but at least this was a significant moderation from the record first-quarter drop of 5.1% y/y.
German GDP Stagnates, Italian GDP Contracts Anew
Overall Eurozone economic activity was held back in the fourth quarter of 2009 by German economic activity being only flat q/q and Italy suffering renewed contraction. Germany had previously led the Eurozone out of recession with growth of 0.7% q/q in the third quarter of 2009 and 0.4% q/q in the second quarter. This followed four quarters of contraction, including a 3.5% q/q plunge in the first quarter of 2009. Consequently, German GDP was still down 2.4% y/y in the fourth quarter of 2009 and contracted by 4.9% over the year as a whole. German exports have played a leading role in the country's overall recovery from recession, just as they were a major factor in the recession being so marked when they were hammered by the collapse in world trade in late 2008/early 2009.
Meanwhile, the Italian economy suffered renewed contraction in the fourth quarter as GDP fell by 0.2% q/q. This may have been partly a correction after Italy had exited recession in the third quarter with surprisingly firm growth of 0.6% q/q. The fourth-quarter relapse means that the Italian economy has contracted for six of the past seven quarters and leaves GDP down 2.8% y/y.
In contrast, French GDP growth accelerated to 0.6% q/q in the fourth quarter of 2009 from 0.2% q/q in the third quarter and 0.3% q/q in the second quarter. Although France had also previously experienced four quarters of recession through to the first quarter of 2009, the contraction had been much shallower than in Germany, so GDP declined a lesser 2.2% overall in 2009 and was down by just 0.3% y/y in the fourth quarter. Apart from France, only Slovakia saw improved growth in the fourth quarter of 2009. Slovakian GDP growth picked up to 2.0% q/q from 1.6% q/q in the third quarter, although it was still down 2.7% y/y.
The Netherlands saw GDP expansion moderate to 0.3% q/q in the fourth quarter from 0.5% q/q in the third quarter. This followed four quarters of contraction. The y/y decline in Dutch GDP moderated to 2.2% in the fourth quarter from a peak of 5.5% in the second quarter. GDP contracted 4.0% overall in 2009. Belgian GDP growth also moderated to 0.3% q/q in the fourth quarter of 2009, when it was down 0.8% y/y. Belgian GDP had previously expanded 0.7% q/q in the third quarter after four quarters of contraction. Meanwhile, Austrian GDP growth edged back to 0.4% q/q in the fourth quarter after the country had exited recession in the third quarter with expansion of 0.5% q/q. This caused the y/y decline to narrow to 1.8% in the fourth quarter from a peak of 4.5% in the second quarter. Slovenian GDP edged up 0.1% q/q in the fourth quarter after growth of 0.6% q/q in the third quarter and 0.3% q/q in the second. The y/y decline in GDP moderated to 5.8% in the fourth quarter from a peak of 9.0% in the second quarter. However, Finnish GDP was only flat q/q in the fourth quarter after edging out of recession with growth of 0.3% q/q in the third quarter. The depth of Finnish contraction over the four quarters through to the second quarter of 2009 meant that GDP was still down 5.1% y/y in the fourth quarter.
Spain remained in recession during the fourth quarter as GDP edged down by a further 0.1% q/q. This was a seventh successive quarter of contraction, but at least it was down from GDP falls of 0.3% q/q in the third quarter, 1.0% q/q in the second quarter, and 1.7% q/q in the first quarter. Year-on-year Spanish contraction moderated to 3.1% in the fourth quarter from a record 4.2% in the second. Despite substantial government stimulus measures, Spanish recovery prospects continue to be limited by ongoing corrections in the housing and labour markets, as well as the construction sector. Meanwhile, Greece's problems were highlighted by its recession deepening in the fourth quarter as the q/q fall in GDP picked up to 0.8% from 0.5% in the third quarter. This was a fifth successive q/q decline and left GDP down 2.6% y/y. Cyprus's economy also contracted for a fifth quarter running, although the rate of decline narrowed to 0.3% q/q in the fourth quarter from 0.8% q/q in the third quarter. Cypriot GDP was down 2.7% y/y. Completing the largely softer picture, Portuguese GDP was only flat q/q in the fourth quarter following expansion of 0.6% q/q in both the third and second quarters. Portuguese GDP was down 0.8% y/y in the fourth quarter.
Eurozone Domestic Demand Contracts
Eurozone domestic demand disappointingly contracted by 0.2% q/q in the fourth quarter as consumer spending and inventories were flat, while investment contracted appreciably further. Consequently, the little growth that was achieved was due to a positive contribution of 0.3 percentage point from net trade.
Eurozone consumer spending was only flat q/q in the fourth quarter of 2009, having fallen 0.2% q/q in the third quarter. Consumption had previously edged up by 0.1% q/q in the second quarter following contraction of 0.5% q/q in the first quarter. Consequently, it was down 0.6% y/y in the fourth quarter. Consumption had been lifted in the second quarter by the car scrappage schemes enacted in a number of countries (most notably Germany) but these had a reduced positive impact overall in the third and fourth quarters. Meanwhile, although consumers' purchasing power was boosted by deflation/low inflation and tax cuts in some countries, this was countered by markedly higher and rising unemployment, persistently tight credit conditions, and still elevated concerns over the economic situation, personal finances, and jobs.
Meanwhile, Eurozone gross fixed capital formation contracted by a further 0.8% q/q in the fourth quarter. At least though, this was down from drops of 0.9% q/q in the third quarter, 1.7% q/q in the second quarter, and a very substantial 5.4% q/q in the first quarter. The y/y decline in gross fixed capital formation narrowed to 8.7% in the fourth quarter from 11.6% in the third quarter and 1.9% in the second. Business investment clearly contracted at a reduced rate overall across the Eurozone in the second half of 2009 as business confidence improved, but it was still hit by muted demand, substantial excess capacity, ongoing tight credit conditions, and weakened profitability. It is also likely that increased government spending on infrastructure as part of stimulus measures was a factor causing the decline in Eurozone gross fixed capital formation to moderate as 2009 progressed. However, government spending actually edged down by 0.1% q/q in the fourth quarter after stimulus measures had underpinned robust increases of 0.8% q/q in the third quarter and 0.6% q/q in both the second and first quarters. Government spending was up 1.8% y/y in the fourth quarter.
Inventories were flat in the fourth quarter of 2009 after making a positive contribution of 0.5 percentage point to Eurozone q/q GDP in the third quarter when they were pared at a reduced rate in many countries or even built up in some. This was in marked contrast to the sharp negative contributions of 0.6 percentage point in the second quarter and 0.9 percentage point in the first quarter when stocks were slashed in reaction to the plunge in domestic and global demand seen in the latter months of 2008 and the early months of 2009.
Net trade made a positive contribution of 0.3 percentage point to Eurozone q/q GDP in the fourth quarter. This followed positive contributions of 0.1 percentage point in the third quarter and 0.6 percentage point in the second quarter. In very marked contrast, net trade had made major negative contributions to Eurozone GDP in the first quarter (0.3 percentage point) and in particular the fourth quarter of 2008 (1.1 percentage point). Eurozone exports of goods and services grew by 1.7% q/q in the fourth quarter as global economic activity and trade continued to recover to some extent from the hammering that they had suffered in early 2009/late 2008. This outweighed the dampening impact of the strong euro, which hit an 18-month high of 1 euro:US$1.515 in November 2009. Even so, export growth was down from 2.9% q/q in the third quarter and exports were still down 6.9% y/y, reflecting the substantial falls suffered in the early months of 2009 and late 2008. Meanwhile, Eurozone imports of goods and services rose by a lesser 0.9% q/q in the fourth quarter following growth of 2.8% q/q in the third quarter. Imports fell heavily q/q in the second and, particularly, the first quarter, so were still down 6.9% y/y in the fourth quarter.
Outlook and Implications
Latest data and survey evidence point to ongoing growth in the Eurozone during the first quarter of 2010, but they are somewhat mixed and there is still little real sense that the recovery is kicking on. For example, the composite indicator for the Eurozone purchasing managers' manufacturing and service-sector surveys compiled by Markit Economics eased back to 53.7 in February after reaching a 26-month high of 54.2 in December, although February was still the seventh successive month that the indicator had been above the critical 50.0 level that signifies stable activity. The survey for the key Eurozone service sector showed that growth in activity and incoming new business slowed modestly for a second month running in February. This countered a further pick-up in manufacturing activity to a 30-month high in February. Similarly, overall Eurozone economic sentiment edged back in February, having risen throughout the previous 10 months to a 19-month high in January. Most business sectors saw sentiment edge back in February, with the exception of service companies, while consumer confidence slipped for the first time since March 2009. Indeed, significant concerns persist over the strength of consumer spending, with latest data showing that Eurozone retail sales volumes fell 0.3% m/m and 1.3% y/y in January.
Economic activity is currently still being supported by monetary and fiscal stimulus measures, in addition to the help provided to banking sectors. Furthermore, recent low consumer price inflation/deflation has boosted consumers' purchasing power. Meanwhile, inventory developments are now generally more favourable as stocks are either run down at a reduced rate after being slashed in late 2008/early 2009 or are even starting to be rebuilt in a number of countries. In addition, Eurozone exports have benefited from a pick-up in global economic activity and trade.
Nevertheless, IHS Global Insight suspects that Eurozone economic recovery will remain gradual during 2010 and will be prone to losses of momentum. Economic activity will be hampered by the withdrawal of some stimulus measures, including car scrappage schemes and employment support measures. In addition, inventory developments can support economic growth for only a limited period without a significant pick-up in demand. Meanwhile, Eurozone growth is expected to be limited for some time to come by relatively high and still rising unemployment, persistently tight credit conditions amid still marked financial sector problems, and significant excess capacity (which limits the need for business investment).
The Eurozone will therefore be fervently hoping that global growth and trade can sustain recovery over the coming months, thereby boosting its own recovery prospects; and the Eurozone will be helped by the euro retreating to currently trade around 1 euro:US$1.36, compared with last November's peak of 1 euro:US$1.5145.
On balance, we project that Eurozone GDP growth in 2010 will be limited to 1.0%. All of the major Eurozone economies are seen expanding in 2010, with the exception of Spain (which is seen contracting by a further 0.5%). Germany is expected to lead the way in 2010 with growth of 1.5%, while expansion is also anticipated in France (1.4%), Italy (0.7%), and the Netherlands (1.1%).
The Eurozone's upturn is expected to gradually become more firmly established in 2011—when GDP growth is forecast at 1.5%—helped by a stabilisation and then gradual improvement in labour markets, as well as stronger global growth.
However, the upside for Eurozone growth is likely to be limited both in 2011 and beyond by a widespread marked tightening of fiscal policy as governments seek to rein in bloated budget deficits. In fact, the likely fragility of the Eurozone recovery means that both governments and the European Central Bank need to be wary about withdrawing stimulus measures too soon or too aggressively.