Euro Zone Q3 2013 GDP Preview: Recovery Lacks Momentum As Growth Slows In Germany, France

The euro zone is expected to eke out marginal economic growth in the third quarter, indicating that while the single currency bloc is sustaining a very modest recovery, it’s struggling to gain momentum.

The 0.3 percent growth seen in the second quarter that ended the region’s record-long recession was a one-time spurt, boosted by a significant bounce in construction activity in some countries (most notably Germany) after it had been held back in the first quarter by particularly poor weather. Gross domestic product in the euro area probably rose just 0.1 percent in the third quarter, according to economists’ consensus estimate.

The European Union’s statistics office will publish preliminary GDP data for the 17-nation euro area on Thursday. Although no details will be released regarding the component breakdown of the figure, IHS Global Insight’s Howard Archer predicts that there could have been a modest pickup in consumer spending overall across the euro zone supported by improved consumer confidence and the boost to purchasing power from very low inflation across the region. In addition, labor markets are showing signs of stabilizing, albeit with unemployment at a very high level.

However, Archer notes that overall investment could well have been essentially flat or even fallen modestly anew in the third quarter after rising 0.3 percent in the second quarter following extended contraction. Investment was boosted in the second quarter by the rebound in construction investment. Business investment still appears to be generally limited across the euro zone.

“While business confidence has improved across the region in recent months, it is still hardly buoyant, and there is generally little need to invest to add capacity,” Archer said in a note. “Furthermore, credit conditions remain tight in many countries.”

Meanwhile, public investment and government spending continue to be limited across the euro zone by very weak public finances. In addition, net trade is unlikely to have made a strong overall contribution to euro zone GDP growth in the third quarter, with exports limited by muted global growth and a relatively strong euro, according to Archer.

On the country level, data out already show that Spain crawled out of extended recession in the third quarter with GDP growth of 0.1 percent quarter-on-quarter, which was highly dependent on positive net exports and also likely helped by a strong tourism season. Spain's economy has been shrinking or close to flat since a decade-long property bubble burst in 2008. In addition, Belgian GDP growth improved marginally to 0.3 percent quarter-on-quarter in the third quarter from 0.2 percent in the second quarter.

But the German and French economies are likely to have both slowed fairly sharply. Italian GDP probably also dropped, albeit at a slightly slower pace than in the second quarter.

France, Germany, Italy, Austria, the Netherlands and Portugal are all due to release flash estimates on Nov. 14.

Germany’s much-vaunted engine of growth, the industrial sector, appears to have sputtered somewhat. September’s monthly fall means that industrial production rose by just 0.6 percent in the third quarter overall, compared to the 2.1 percent gain posted in the April-June period. Other things being equal, James Howat from Capital Economics calculates that this would shave close to 0.4 percent off GDP growth compared to second-quarter’s 0.7 percent growth.

Other hard data have had a fairly neutral tone, with retail sales falling by 0.1 percent in third quarter, the same result as in the second, and the trade surplus expanding a bit in the third quarter.

Overall, Howat has penciled in a 0.4 percent quarterly rise in German GDP, nudging the annual growth rate up just a touch from 0.5 percent to 0.7 percent.

French GDP is unlikely to repeat the second-quarter’s surprisingly strong outturn of 0.5 percent either. Economists expect the French GDP to remain flat in the third quarter, paying back some of the upside surprise of the second quarter.

The French data will follow less than a week after the country’s Nov. 8 downgrade to AA by Standard & Poor’s, which argued that the government’s actions in areas like taxation and the labor market would probably not have much positive impact on France’s medium-term growth and that “high unemployment is weakening support for further significant fiscal and structural policy measures.”

In addition, the flash estimate of GDP for the third quarter will probably show that Italy remained one of the euro zone’s worst performers and is yet to exit its two-year long recession, according to Howat.

The Italian economy contracted by 0.3 percent in second quarter, its smallest quarterly decline in seven quarters. Antonio Golini, the acting chairman of Istat, told Parliament on Oct. 29 that the economy had continued to shrink in the third quarter and that Italy's GDP will lose 1.8 percent this year, more than the 1.4 percent his office predicted in May.

Archer expects the Netherlands to pull out of recession in the third quarter with GDP expansion of 0.1 percent after the rate of contraction slowed to 0.1 percent in the second quarter from 0.4 percent in the first and a peak drop of 0.9 percent in the third quarter of 2012.

While the European Central Bank’s cutting of its key refinancing rate from 0.50 percent to 0.25 percent on Nov. 7 was primarily driven by euro zone consumer price inflation falling to a well below target level of just 0.7 percent in October, the weak euro zone economic recovery from extended recession also strongly supported the case for lower interest rates.

“We expect persistent very low euro zone consumer price inflation, ongoing difficulties in building growth momentum and limited improvement in euro zone credit conditions will prompt further action from the ECB,” Archer said. “The ECB could also be prompted to act if there are significant moves up in market interest rates when the U.S. Federal Reserve finally starts to taper.”