German GDP Beat Saves The Day
There was little good news out of Europe overnight, when several key countries (Germany, France, Greece and Portugal) reported their Q1 GDP, but what good news did come, namely that Germany avoided a double dip, with Q1 GDP printing at 0.5% on expectations of a 0.1% move, has for now saved the EURUSD and the futures. Why the growth: according to the German statistics office, net trade drove 1Q growth (thank you weaker EUR); domestic consumption rose in 1Q while investment declined in 1Q. The sellside community was quick: "Germany’s 1Q numbers show how EMU’s biggest economy is weathering debt crisis", Newedge said in a note. Then there was everyone else: Italian GDP contracted by 0.8%, more than consensus of 0.7%, the most in 3 years. Broadly, the Eurozone GDP avoided a technical recession with GDP printing at 0.0% on estimates of -0.2%. But as the PMI vs GDP chart below shows, this razor thin escape will hardly be repeated in Q2. Greek GDP declined by 6.2%, Portugal down by 0.1%, Holland down -0.2%, and so on. The well known split in Europe between Germany and everyone else continues, and just as we pointed out yesterday for the US: any "decoupling" is always temporary, and eventually catches up with the decouplee. Finally, proving that not all is well even in Germany, the ZEW Investor Confidence for May printed at nearly half expectations of 19, or 10.8, and down from 23.4.
Some charts showing the European economy in Q1:
Decoupling: German PMI vs Everyone else:
And why the decoupling will not last:
Some more from the WSJ:
According to a definition accepted by many economists, two straight quarters of falling gross domestic product constitute a recession. By avoiding a contraction in the first quarter, the euro zone also avoided entering recession.
However, the widening gap between the euro zone's largest and strongest member and southern European economies in the grip of austerity could pose political problems.
The European Union's official statistics agency Eurostat on Tuesday said euro-zone GDP was unchanged from the fourth quarter, and from the first quarter of 2011. That followed a contraction of 0.3% in the fourth quarter.
Economists surveyed by Dow Jones Newswires last week estimated that GDP fell by 0.2%. The European Commission on Friday said it expects the euro-zone economy to contract by 0.3% this year, then expand by 1.0% in 2013.
The stagnation in GDP highlights the challenges faced by the euro zone as many of its members push through harsh austerity programs designed to cut large debts and regain the confidence of bond investors.
But those austerity measures can hinder economic growth, pushing up unemployment and fueling social and political tensions that in turn cause investors to doubt the ability of governments to stick to their plans.
The figures released Tuesday revealed a large disparity between Germany's strong economic performance and the increasing weakness evident in southern European members.
Germany's economy expanded by 0.5% from the fourth quarter, and by 1.2% from the first quarter of 2011, while quarter-on-quarter Austria's economy expanded by 0.2% Belgium's economy grew by 0.3% and Finland's economy grew by 1.3%. France's economy stagnated.
By contrast, Italy's economy contracted by 0.8%, and for the third straight quarter, while the Spanish economy contracted by 0.3% and for the second straight quarter, thereby entering recession.
Portugal's economy remained in recession, as did the economy of Cyprus.
"One thing is at least for sure: the German economy remains the powerhouse of the euro-zone economy," said Carsten Brzeski, an economist at ING Bank. "Any euro-zone rebalancing still looks like a scenario of a remote future."
Finally, here is Goldman's take on German GDP:
BOTTOM LINE: Germany Q1 GDP surprised on the upside showing a strong return to positive growth, printing at +0.5%qoq after -0.2%qoq in Q4. This was notably better than our and the consensus expectation (Cons: +0.1%qoq, GS: +0.2%qoq). This suggests upside risk to Euro area wide Q1 GDP released today at 11.00 (CET).
1. German GDP returned quickly to its expansionary path in Q1 following the dip in Q4 (at -0.2%qoq), growing in line with the Q3 of last year (+0.6%qoq). German GDP now stands about 1% above it pre-crisis peak.
2. The German statistical office does not release the full break down until next week (24 May). The statistical office, however, noted that exports were the main driver, while private consumption also contributed to growth. Investments appear to have declined.
3. The strong German Q1 GDP print support our view that easy financing conditions in Germany – resulting in part from ECB policy actions of both a conventional and non-conventional nature designed to support the periphery – provide a powerful stimulus to growth in Germany.
4. Today’s strong release lends support to stronger signal given by the Ifo relative to weaker PMI. The Ifo survey has signalled continuous stronger momentum through Q1, with little sequential change. The PMI, averaging a lower level in general, however, has lost momentum over the past two months. On the most recent monthly ‘hard’ data, German manufacturing output showed a strong sequential increase of +1.4%mom. Thus indicators remains mixed in terms of sequential direction throughout what appears to have been a solid quarter in terms of growth.
5. For the Euro area aggregate, we expect Q1 to have print at -0.2% later this morning. However, with French Q1 GDP printing flat - slightly better than we had expected (-0.1%qoq, Cons: 0.0%qoq) – risk seems now skewed to the upside. This would be in line with the Euro area average Composite PMI and our CAI indicator
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