Euro: Private consumption continued to strengthen in Q2

Euro: Private consumption continued to strengthen in Q2 – we expect higher GDP growth in H2

The stagnation in euro area GDP in Q2 was confirmed by the second release today. However, the details were better than the headline figure as private consumption continued to strengthen and there was a negative impact on GDP growth from changes in inventories of 0.2pp. Overall, this is in line with our view that the weakness in activity in Q2 was temporary.
The drag on growth from changes in inventories is likely to reflect that euro companies were surprised by the weak demand from the US and China in Q1 and thus built up inventories. However, this should be temporary, as the US economy has recovered. The latest figure for German industrial production confirms that production is increasing again as it rose 1.9% m/m in July.
The increase in private consumption of 0.3% q/q in Q2 from 0.2% q/q in Q1 should reflect the improvement in consumer confidence as the unemployment rate has started to decline. Moreover, lower commodity price inflation has supported real wage growth, which started to increase in 2013, having been negative during 2011-12.
In line with expectations, there was a decline in fixed investments. The weakness partly reflects one-off factors, but it should also be seen in light of the weakness in the US and China together with the uncertainty related to the situation in Ukraine. These factors could have resulted in a wait-and-see attitude among companies.
Looking ahead, we expect higher GDP growth. This should follow as global demand will support activity and real wages growth will continue to be positive due to low commodity price inflation. Moreover, banks are deleveraging at a slower pace and going forward, the ECB’s TLTROs and ABS purchase programme will enhance the transmission of credit. The ECB’s easing measures should further support activity as the headwind from the appreciation of the exchange rate will fade and lower yields will encourage business investments and foster higher spending among consumers.

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