Euro area GDP growth strengthens but less than expected

Euro area GDP growth improved slightly to 0.4% q/q in Q1 in line with consensus but below our forecast.

Compared to Q4 14, when the economy expanded 0.3% q/q, the higher GDP growth is mainly the result of stronger domestic demand. Especially private consumption strengthened further in Q1, as it was supported by the very low oil price that lifted consumers’ purchasing power.

Compared to our expectations, the disappointment in GDP growth is due to a smaller contribution from net exports, because of the slowdown in the US and China in Q1. Despite the weakness in net exports, GDP growth in the euro area was higher than in both the US and the UK in Q1.

Looking into Q2, we expect weaker growth in private consumption as the higher oil price becomes a headwind. On the other hand, net exports should have a larger positive contribution as we expect foreign demand to pick up as the US and China are set to recover. The slowdown in private consumption is expected to dominate and we look for weaker growth in Q2 compared to Q1.

Nevertheless, the economy is still supported by 1) the weaker effective euro, 2) cheaper and more accessible bank lending, 3) fading uncertainty and 4) less fiscal headwind. Hence, growth should remain positive and strengthen again in H2.

In Q1 German GDP growth surprised on the downside as it slowed to 0.3% q/q from 0.7% q/q in Q4 14. The GDP components have not been released yet but according to the German statistical office, positive contributions mainly came from domestic demand. It was noted that investments in both construction and machinery and equipment should have been markedly up compared with Q4 14. Hence, the slowdown in GDP growth should not be the result of the latest weakness in German orders but this is likely to be seen in the figures for Q2. Net exports should have had a downward effect on activity although export figures were slightly up, but since imports recorded a much stronger increase.

French GDP growth on the other hand was stronger than expected as it grew 0.6% q/q in Q1 up from 0.1% q/q in Q4 14. The higher GDP growth was driven by private consumption, which accelerated to 0.8% q/q in Q1 after 0.1% q/q in Q4 14. Investments declined 0.2% q/q in Q1 after falling 0.4% in Q4. Net exports contributed negatively to GDP growth and had a drag of 0.5pp also due to slower growth in exports, while imports accelerated. Some of the improvement in French activity was also due to changes in inventories, which contributed positively by 0.5pp to GDP growth after a drag of 0.3pp in Q4 14.

Italian GDP growth was up from 0.0% q/q in Q4 14 to 0.3% q/q in Q1, which is the highest growth rate since Q1 11. The higher growth is in line with the progress in the manufacturing PMI seen during Q1, which should have followed as the weaker effective euro supports the Italian economy.