MNI Data Analysis: EZ GDP Growth Set To Edge Higher In Q1

- The export-oriented Eurozone economy has been hit harder by the global trade

slowdown than other big regions

- Expected pick-up in Q1 growth not likely to be the start of a sustained

turnaround

- Consumers, businesses and policymakers remain in wait-and-see mode as

uncertainty weighs heavily

- Near-term outlook remains weak but hopes for a summer turnaround still alive

By Jaspreet Sehmi

     LONDON (MNI) - The preliminary flash estimate, due to be published by

Eurostat later this morning, is expected to show quarterly growth edging up

slightly (to 0.3% from 0.2% in Q4). 

     Upside Surprises Dominate Over Past Decade

     MNI's analysis of historical actual vs. consensus data reveals that Q1

quarterly GDP outturns have come in stronger-than-expected by the markets on six

occasions over the past decade, twice coming in weaker and twice in line. With

an average forecast differential (actual - forecast) over the last ten years of

+0.1pp, our analysis suggests a small potential for an upside surprise. However,

the economic data available so far for Q1 indicate that any pick-up in growth is

likely to be minimal and thus lessens the chance of a positive surprise. 

     Mixed Messages From Hard & Soft Data... 

     Since the beginning of the year, there has been a notable divergence

between the generally brighter picture painted by the official data and the

downbeat signals coming from the survey evidence. In terms of hard data,

industrial production, retail sales and construction all look on course for an

improved performance in Q1. 

     Survey-wise however, things have generally continued to deteriorate. The

Economic Sentiment Indicator has maintained its descent, the Ifo deteriorated

further, and while the EZ Composite PMI has trended broadly sideways since the

start of the year, it fell to a three-month low of 51.3 in April. All these

surveys signal an ongoing manufacturing recession, while other sectors of the

economy continue to hold up well. 

     The ZEW indicator, however, has been a bright spot amongst the survey data,

with expectations having rebounded this year. While not the best guide to

economic performance, the indicator has historically been a good harbinger of

business cycle turning points, and thus adds to evidence that a turnaround could

be approaching. 

     ... Suggest We May Be Nearing An Inflection Point

     The fact that the dataflow has turned from consistently disappointing to

mixed is in itself an indication that the Eurozone economy may be reaching an

inflection point.

     Recent data out of China indicates that stimulus measures have started to

take effect. Moreover, US-China trade talks appear to be making progress, US

economic growth remains healthy and the risk of an immediate hard Brexit has

dissipated. In addition, domestic fundamentals remain robust, with favourable

financing conditions, healthy labour market developments and a supportive policy

backdrop.

     But Outlook Still Clouded By Thick Fog Of Uncertainty 

     While there are some reasons for optimism, the sheer multitude and gravity

of uncertainties means that consumers, businesses and policymakers across the

bloc remain stuck in wait-and-see mode. Indeed, Chinese stimulus measures could

lose steam, the Brexit process remains volatile (and without a clear endgame),

and the US is still on the trade offensive (with potential tariffs on auto

imports of particular concern for the EU). 

     Developments Across The Big Four

     Q1 data for Germany, the Eurozone's largest economy, won't be published

until 15 May. After narrowly avoiding a recession in H2 2018, the economy is

expected to have expanded in Q1, but only at a feeble pace. Germany is the most

exposed of the Big 4 economies to external developments given its reliance on

its export-dependent industrial sector. As such, it has been hit hardest by the

global downswing, but should correspondingly see a stronger bounce once the

global cycle turns. 

     In France, where manufacturing accounts for a smaller share of the economy,

growth has held up better and is expected to remain steady in Q1. President

Macron's recently announced income tax cuts (in response to months of

anti-government protests) should help to bolster consumption going forward. 

     Italy fell into a technical recession in H2 2018 and while economic

fundamentals remain weak, hard data suggests the economy may have registered

mildly positive growth in the first quarter. 

     While political uncertainty in Spain has been and remains elevated

following Sunday's inconclusive general election result, the economy looks set

to continue outperforming its Big Four peers in the first half of the year.

While growth rates should return to more normal rates soon, past structural

reforms have spurred strong catch-up growth.

--MNI London Bureau; +44 207-862-7489; email: ukeditorial@marketnews.com

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