- THE MAGAZINE
Eurozone GDP growth improved to 0.3 percent quarter-on-quarter in Q4 2013. While still far from dynamic, it was a step back in the right direction after growth had slowed to just 0.1 percent in Q3. Furthermore, it marked a third successive quarter of expansion following six quarters of contraction through to Q1 2013. It also meant that Eurozone GDP was up 0.5 percent year-on-year in Q4 2013, which was the first annual growth since Q4 2011. Nevertheless, Eurozone GDP still contracted 0.4 percent overall in 2013.
Most Eurozone economies saw an improved performance in Q4 2013, with the core northern Eurozone economies generally growing by around 0.3 to 0.4 percent quarter-on-quarter, including Germany (0.4 percent) and France (0.3 percent). An exception was the previously struggling Dutch economy where GDP spiked up 0.7 percent quarter-on-quarter
Encouragingly, there were further signs of improvement in the long-suffering struggling southern periphery countries. Spain grew for a second successive quarter in Q4 2013 GDP growth picking up modestly to 0.3 percent quarter-on-quarter while Italy eked out growth of 0.1 percent quarter-on-quarter after the economy stabilized in Q3. While marginal, this was the first Italian expansion since Q2 2011. Furthermore, Portugal grew for a third successive quarter and by a decent 0.5 percent quarter-on-quarter. There was also a further slowdown in year-on-year Greek GDP contraction to 2.6 percent.
No details were released of the component breakdown of Q4 Eurozone GDP but the impression emerging from individual countries is that positive net trade and improving investment contributed significantly to growth. However, consumer spending appears to have been generally lackluster (except in France where it rose 0.5 percent ahead of a January 2014 VAT hike). In addition, it is notable reduced inventories were a significant drag on growth in both Germany and France.
We expect Eurozone GDP to grow by 1.1 percent in 2014, which would be the best performance since 2011. Reduced fiscal squeezes, very accomodative monetary policy, improving global growth (despite the current concern over emerging markets) and sharply reduced sovereign debt concerns provide a more encouraging backdrop than the Eurozone has faced for some time. Business and consumer confidence is generally improving, while Eurozone labour markets appear to have stabilized overall. Meanwhile, low consumer price inflation is helping purchasing power.
Nevertheless, it is still going to be far from plain sailing for the Eurozone in 2014 as a number of significant growth constraints remain. Fiscal policy is still generally restrictive (despite the increased flexibility now being allowed on fiscal targets), credit conditions remain tight in many countries amid still significant banking sector problems, unemployment remains elevated and still seems unlikely to come down markedly anytime soon while consumer purchasing power is limited by very low wage growth. Furthermore, Eurozone exporters will not have been helped by the euro trading at a 26-month high close to US$1.39 in late December and it is still uncomfortably strong at close to US$1.37.
The modestly better-than-expected pick-up in Eurozone GDP growth in the fourth quarter of 2013 slightly eases some of the appreciable pressure on the ECB to take immediate further stimulative action to counter the renewed dip in Eurozone consumer price inflation to just 0.7 percent in January as well as still falling bank lending to businesses. Nevertheless, we expect persistent very low Eurozone consumer price inflation, ongoing difficulties in building growth momentum and still tight Eurozone credit conditions will prompt further action from the ECB.