Global Daily – Eurozone growth holds up, despite uncertainty

by: Aline Schuiling , Arjen van Dijkhuizen

Euro Macro: Germany’s GDP growth picks up in Q2, Eurozone growth revised higher – GDP growth in Germany strengthened to 0.5% qoq in Q2, up from 0.3% in Q1. Details have not been published yet, but the rise in growth probably stemmed from a rebound in the components that were temporarily depressed in Q1 by, for instance, weather conditions and the timing of holidays. According to the Statistisches Bundesamt, private consumption, government consumption and fixed investment all contributed positively to growth, whereas growth was reduced by net exports. Looking ahead, we expect net exports to continue to depress growth in the second half of the year, albeit modestly. The outlook for domestic demand remains rosy and we expect robust expansion of consumption and investment. We have pencilled in GDP growth of around 0.4-0.5% qoq in Q3 and Q4. The Netherlands also published the first estimate for Q2 GDP growth this morning. It showed that growth picked up somewhat in this country as well, to 0.7% qoq, up from 0.6% in Q1. Due to the pick-up in growth in Germany and the Netherlands, eurozone GDP growth was revised higher, to 0.4% qoq (the same rate as in Q1), up from the first estimate of 0.3%. Looking ahead, we expect growth to be a touch higher in the second half of the year than in the first half, as the global industrial sector and eurozone exports should regain some momentum following the slowdown in H1. However, the potential negative impact of the ongoing global trade conflict implies that the risks to our scenario are clearly tilted to the downside. (Aline Schuiling)

​China Macro: July data point to ongoing gradual slowdown, more support likely – Activity data for July published today came in weaker than expected, and suggest that China’s slowdown continues, against the background of a financial deleveraging campaign and escalating frictions with the US. Growth of industrial production stabilised at 6.0% yoy, retail sales cooled to 8.8% yoy (June: 9.0%), and fixed investment slowed to a record low of 5.5% yoy ytd (June: 6.0%), driven lower by weak public investment, particularly infrastructure. PMIs published earlier by NBS/Caixin had also weakened compared to June levels, both for manufacturing and services. Some data are more encouraging, though. Foreign trade data published last week were remarkably solid, showing that the escalating trade conflict has not really taken its toll on these flows yet. The property market also showed resilience. All in all, Bloomberg’s monthly GDP estimate was stable at 6.7% yoy in July, a bit below the 7.0% average for the first half of 2018. We expect Beijing to further relax its policy stance, tweaking (but not completely abandoning) its financial deleveraging campaign. In recent months, the PBoC cut banks’ reserve requirements and used its Medium-Term Lending Facility as well to safeguard systemic bank liquidity. This has resulted already in an easing of financial conditions. Banking regulators have also taken steps to support bank lending to the real economy, particularly to SMEs. We expect the government to relax fiscal policy as well, with issuance of local government bonds likely picking up in coming months. All in all, we expect China’s slowdown to remain gradual. (Arjen van Dijkhuizen)