• In recent months we have seen several indications of lacklustre growth in Euroland and the news that GDP hardly grew in the last quarter of 2009 was pretty terrifying.
  • If Euroland slides back into a double dip at the current juncture not much can be done. The gas pedal is already at full speed with the loosest monetary and fiscal policy ever.
  • Fortunately most forward looking indicators give more upbeat signals. Exports are likely to be a key driver of growth in the coming quarters. We expect the economic recovery to continue, but due to a weak Q4 reading, we lowered our GDP projection for 2010 to 1.8% y/y. This is still above the consensus projection of 1.3% y/y.
  • The fiscal chaos in Greece has been a key driver of the financial markets. Greece is now moving in the right direction as it has put rather ambitious austerity plans forward.
  • ECB will continue with its exit strategy for non-standard measures. We expect a first interest rate hike in Q1 2011. Inflation will remain low in both 2010 and 2011.

Overview

Euroland growth was surprisingly weak in Q4 2009 with GDP growing a mere 0.1% q/q. France saw highest growth (0.6% q/q) among the larger euro area members, while Germany saw a flat GDP. Spain remained in recession (-0.1% q/q), while Italy slipped back into recession (-0.2% q/q) after a more impressive Q3 reading of 0.6% q/q.

The breakdown of growth in Q4 indicates that overall domestic demand excluding public spending remains weak and is pulling down activity, while public consumption stayed strong in Q4 supporting growth. Net exports contributed positively to economic activity in all major countries. Germany benefitted in particular from rising exports to the non-euro area, as exports to Asia have accelerated sharply in recent quarters. Despite the tiny growth unemployment has been stable at 9.9% over the past three months.

The latest data for retail sales and industrial production have been disappointing too. This bodes for a somewhat weak Q1 2010. It is difficult to gauge the effect from the hard winter across Europe, but we suspect that if anything it has been a drag on activity over the past couple of months.

While downside risks for Europe clearly have risen in the past months, we take comfort in more upbeat signals from “soft data”. Manufacturing surveys indicate that new export orders accelerate, while employment components support our view that a labour market stabilisation may not be as far away as indicated by the GDP data. German business and consumer expectation indicators have improved too.