Just when Europe managed to get away from the headline rotation for one whole day, it is back with a thud, reminding everyone that at the heart of it all is not a liquidity crisis but a solvency one, after both German and EU GDP surprisingly missed consensus. And what a surprise it was: while everyone was talking about stagflation in the US, the UK, even China, few if anyone dared to mention that word in the same sentence with Germany. That may change after Q2 GDP expanded by just 0.1% in Q2, on expectations of 0.5% growth and down from a downward revised 1.3% (from 1.5%) previously, (2.8% growth Y/Y vs exp of 3.2%). According to the stats office the weak result was primarily due to weaker net trade and consumption. Well if export-focused and mostly wealthy Germany can't generate enough growth through these two core sources of economic output, then nobody can. The immediate result of this datapoint was Commerzbank, and soon other, analysts lowering their GDP forecasts for 2011 to 3% from 3.4%. Germany is still expected to grow faster than the rest of the Eurozone but not by much any longer as this latest decoupling thesis starts to implode. And speaking of Eurozone GDP, it too surprised to the downside, printing at 0.2% on expectations of 0.3$ Q/Q, down from 0.8% previously (or up 1.7% Y/Y on expectations of 1/8%). The accelerating contraction of the European (and German) economy proves that just like in 2008, the ECB's series of rate hikes was the most misguided decision possible by the world's most clueless central bank, and anyone hoping for more rate hikes can kiss such dreams and aspirations goodbye.The net result: yesterday's entire no volume stock market levitation is about to be undone. Too bad the ECB can't buy some extra GDP for its insolvent (and solvent... for now) member countries.
Goldman with some more color on the Eurozone GDP miss...
GDP details are not released so far and there is also not enough information available on the country level to gauge the Euro-zone aggregate with any precision at this point.
Looking at the country data it is noteworthy that Italy and Spain grew stronger than Germany, France, and the Netherlands in Q2, implying that the divergence among EMU5 countries did not proceed further in Q2 (see below). That being said we think that the German and French Q2 GDP figures somewhat understate the underlying momentum and we expect the periperhal economies to underperform again in Q3.
Today's GDP figures will weigh on the minds of ECB Governing Council members. The ECB saw the risk to growth as being "broadly balanced" in August, but the sluggish Q2 GDP figures in conjunction with the further weakening of July business surveys may tilt the balance now towards "downside risks".
Country figures (quarterly change):
Germany: +0.1% after +1.3%
France: 0.0% after +0.9%
Italy: +0.3% after +0.1%
Spain: +0.2% after +0.3%
Netherlands: +0.1% after +0.8%
Belgium: +0.7% after +0.7%
Austria: +1.0% after 0.8%
Finland: +1.2% after +0.4%
Portugal: 0.0% after -0.6%.
And on Germany...
The recovery in Germany came to a halt in Q2 as GDP edged only 0.1%qoq higher after +1.3%qoq in Q1 (revised down from +1.5% initially).
A detailed breakdown of the headline figure will be released only at the end of August but the statistical office already stated that net trade contributed negatively to growth in the second quarter. Consumption and construction investment were apparently also a drag on growth. Note, that the negative contribution from net trade comes on the back of imports rising faster than exports and that exports, according to the statistical office, gave a "positive impulse" to growth.
While these figures are clearly disappointing we think that the headline figure understates the underlying momentum. For one, industrial production was up 1.1%qoq in Q2 which, at least on past form, would have pointed to healthy growth in the second quarter. Moreover, manufacturing orders rose 3.2%qoq suggesting that industrial activity will expand robustly in the coming months.
Business surveys are also not consistent with a stagnating economy. The assessment of business conditions in the German Ifo, for example, stood around 20 points above its long-term average in the second quarter.
We will have to wait for the GDP details in order to get a better read on the Q2 GDP figures (how much of the negative surprise was due to stronger imports?). But judging from the information available so far we would not take the headline figure at face value.
The statistical office also released a new revised GDP path together with today's Q2 GDP figures. The new path shows a somewhat deeper recession than previously thought and GDP is now still slightly below its pre-crisis peak (see chart).