Euro Macro: Domestic demand resilience prevents GDP growth from slowing – The flash estimate of eurozone GDP growth in Q3 showed that growth stabilised at 0.2% qoq, which was higher than the consensus and our own forecasts (0.1% and 0.0%, respectively). Eurostat has not yet published details of GDP, neither have all individual member states published Q3 data. Still, the information that is available so far, as well monthly activity data and surveys suggest that net exports (corrected for the surge in imports in Q2 that was related to intellectual property investment in Ireland) probably was more negative in Q3 than in Q2. Indeed, France and Spain have already published detailed Q3 GDP data, which showed that net exports reduced GDP growth significantly more in Q3 than in Q2, while the written comment by Italy’s statistical bureau indicates the same. With that said, Germany has not yet published Q3 GDP data (the flash estimate is due on 14 November). As Germany is the largest eurozone economy and has one of the highest shares of goods exports in GDP, we expect German GDP to have contracted in Q3, which could result to a downward revision in the eurozone aggregate growth number.
Looking forward, we expect GDP growth to slow further – to around zero – as domestic demand growth should slow down. Considering the deterioration in the contribution of net exports to growth in Q3, domestic demand growth probably strengthened that quarter. We think this pick-up will be temporary and we expect slowdown in Q4. Private consumption growth will probably weaken as labour market conditions are deterioration. In a separate report that was published by Eurostat today, it turned out that the eurozone unemployment rate stabilised at 7.5% in September. It has been stable at a rate close to 7.5% since April and we expect it to slowly rise as from the start of next year onwards. Besides private consumption, fixed investment is also expected to slow down as a result of the ongoing weakness in exports and industrial production since the start of last year. Indeed, business surveys suggest that the weakness in manufacturing has started to spill over to the services sector. (Aline Schuiling)
Inflation to remain subdued – Meanwhile, eurozone inflation fell to 0.7% yoy in October, from a revised 0.8% yoy in September (was previously 0.9%). The decline in inflation was down to a drag from the energy price component. Core inflation edged up, to 1.1% yoy from 1% the previous month, though it remains in line with the trend of around 1% witnessed over the last three years. We do not expect underlying inflationary pressures to build going forward. The cyclical slowdown in economic growth means that cost pressures are leading to margin compression rather than price rises, while cost pressures are (and should continue) to ease going forward as labour markets loosen. Meanwhile, inflation expectations have declined, both as measured by market pricing, as well as surveys. Low inflation expectations can impact wage and price setting behaviour, which would keep inflation stuck at low levels. (Nick Kounis)