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Global Outlook

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Euroland Outlook − Ascending to the surface

Wed, Sep 23 2009, 07:42 GMT
by Frank Øland Hansen

Danske Bank A/S

• Over the past couple of months the economic recovery has played out pretty much as we anticipated with a strong rebound in confidence indicators and a pick-up in orders and exports.
• We now anticipate above-trend growth in the rest of 2009 followed by lower but also more broad-based growth in 2010. The recovery will be sustainable if domestic demand begins to pick up in early 2010.
• Unemployment could peak earlier and at a lower level than previously anticipated. We expect unemployment to peak in early 2010 at around 10.2%.
• Next summer the euro area will have recovered so much that the ECB will consider interest rates at historical lows as being inappropriate and will start hiking.

Overview

The European economy was descending towards the ocean floor at a dangerous pace in Q1 but managed to get almost neutral buoyancy in Q2. Euroland GDP only declined a modest 0.1 % q/q in Q2 and both France and Germany were already ascending towards the surface with GDP growth in positive territory. Inventories dragged growth down towards the bottom, but net trade gave an equally large push upwards as exports declined by less than imports. Both private and public consumption contributed positively too. The positive contribution from private consumption is good news, but it is important to keep in mind that consumption has been boosted temporarily by the ‘cash for clunkers’ programmes and other stimulus measures. Investment dragged growth down for the fifth consecutive quarter, although at a slowing pace.

Over the past couple of months the economic recovery has played out pretty much as we anticipated with a strong rebound in confidence indicators and a pick-up in orders and exports to Asia. Unemployment has increased sharply, but there are signs of an earlier stabilisation and at a lower level than we previously feared.

We continue to expect above-trend growth in the second half of this year as the inventory reductions are brought to an end and exports make a partial rebound pulled up in particular by Asian demand (see: Research Euroland: In Asia we Trust). We currently project GDP growth of 0.5% q/q in Q3 and 0.8% q/q in Q4. Despite this promising outlook for the rest of the year, overall growth in 2009 is set to be an historical low of about -3.7%.

After a couple of quarters with a strong rebound from very low levels, we expect lower but also more broad-based growth. The recovery will only be sustainable if domestic demand (beyond the inventory cycle) begins to pick up in early 2010. We expect that it will, but are on the watch for signs that it won’t. If domestic demand fails, we could get a nasty double-dip.

• Download full Euroland Outlook with charts

Published on  Wed, Sep 23 2009, 07:46 GMT