Global Daily – Eurozone domestic demand will wane

by: Aline Schuiling

Euro Macro: Eurozone consumption growth to slow after strong Q3 – The details of Q3 GDP growth in the eurozone were published today. Growth remained unchanged from the flash estimate, at 0.2% qoq. Looking at the main components, net exports reduced growth by 0.1pp qoq. Fixed investment and government consumption were slightly positive and each added 0.1pp, while inventory building reduced growth by 0.1 pp. The main surprise was a jump in private consumption growth, which accelerated in Q3, adding 0.3 pps to qoq growth, up from 0.1 in Q2. Looking forward, we expect the positive contribution of final domestic demand to growth to decline. To begin with, we expect fixed investment to weaken, as the impact of the malaise in industrial production that began early 2018 filters through. Indeed, business confidence has declined in the past few quarters as well as the capacity utilisation rate and profit growth. This should weigh on fixed investment in the coming quarters. On top of that, private consumption growth will probably slow down as well, largely due to the deterioration of labour market conditions. Employment growth eased to 0.1% qoq in Q3, down from 0.2% in Q2 and 0.3% in Q1. The deterioration in labour market conditions is also reflected in the fact that the unemployment rate has stopped falling (it has been roughly stable since April) and that consumers have become less optimistic about labour market prospects. The view that private consumption growth is losing momentum was also underlined by a separate report published by Eurostat today, which sowed that the volume of retail sales contracted by 0.6% mom in October, following a 0.2% decline in September. All in all, we expect GDP growth to edge lower to around 0.0.-0.1% qoq in the final quarter of this year and to remain subdued in the first half of 2020. (Aline Schuiling)