[15]The two major overnight data points were European Q2 GDP which printed at -0.2%, or the expected continuation of the European double dip. As SocGen explains, these numbers continue to paint an all too predictable picture of growth in Europe, with expansion in Germany driven by exports and consumption, growth in France stagnating and deep recessions continuing in southern Europe. The European GDP pattern is now expected to be a copy of 2011. Amongst the country details, growth beat expectations in Germany (+0.3 q/q), Austria (0.2%), Slovakia (+0.7%) and the Netherlands (0.2%) but this was offset by deep declines in Finland (-1.0%) and Portugal (-1.2%). Amongst data already published we know Italy declined 0.7%, Spain declined 0.4% and Belgian GDP declined 0.6%. And while the market was clutching at the German GDP beat straw, it was the German ZEW Survey which threw a cog in the spikes of German economic perception, after the number came at a whopping -25.5, declining for the 4th consecutive month and far below expectations of -19.3, and a drop from the already negative -19.6. Finally, while there may be hopes that this is the bottom, already weak IP data confirms that the weakness in Europe has continued into Q3 and as such as the continental contraction will likely not stop contracting for the foreseeable future.
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More on Europe's dimming prospects from SocGen
Looking beyond the headline numbers for a second, it is clear that the ebb and flow of the sovereign debt crisis has generated considerable volatility in the GDP data as firms and households first put their spending plans on hold and then subsequently relax them as financial conditions improve somewhat. This has generated a particularly strong inventory cycle in some countries with imports subsequently leaping to make up an earlier rundown in stocks. This almost certainly explains the jump in French imports which grew 1.8% q/q in Q2 and the marked volatility in French investment which expanded 0.6% in Q2 following a 0.8% contraction in Q1.
IP data suggest weakness extended into Q3
The same volatility is also reflected in the monthly data, where euro area industrial production decline 0.6% m/m in June following a revised 0.9% expansion in May. As such this leaves industrial production down 0.5% q/q in the second quarter and suggests that activity might have taken another lurch down coming into Q3. Certainly this would also be the message of the ZEW survey for August. Our euro area GDP forecast for the year as a whole remains unchanged at -0.4%.
German GDP again above expectations in Q2
German Q2 GDP expanded 0.3 % qoq, which was stronger than median expectations of 0.2% (SG 0.1%), and although not as large an overshoot over the median as in Q1, it was the second successive upside surprise in German GDP.
There are no quantitative details with this flash estimate of German GDP, but the usual qualitative commentary from the statisticians said that net exports added to GDP, and private consumption also expanded (which is a relief, given soft retail and car registration data). Business investment declined, unsurprising given the downward trend in business sentiment.
As always in August, there were revisions to history, going right back to 1991. The key change is that the rebound in 2010 was stronger (4.0% rather than 3.6%), while the recession is still calculated to have depressed 2009 GDP by 5.1%. As a result of the revisions, the level of GDP in Q1 2012 is now thought to be 0.7% larger than previously.
The outlook for Q3 is for somewhat more subdued growth, in our view. Given the slowdown in global trade in the most recent past – judging by Asian trade figures – it is unlikely that net exports will add to growth. Also, German exports to the US were up 19.6% yoy in April/May, which is likely to be difficult to sustain. Meanwhile, with business confidence sliding, it is hard to see a rebound in business investment spending. However, positive momentum in private consumption is likely to persist, and construction investment, too, looks likely to grow solidly for some time to come.
ZEW survey unimpressed by stock market recovery
Against expectations, the ZEW’s Index of economic sentiment deteriorated further in August, sliding to a new 8-month low of -25.5 from -19.6 in July. The expectation of a slight recovery was probably based mostly on the fact that the German stock market has rallied substantially – by some 16% since the start of June. Well, despite the usual reasonable fit between these two series, this did not work out this time around. The current situation was also judged more negatively by the private sector forecasters that make up the panel for this survey, with that index down to 18.2 from 21.1, though this was a little better than median predictions.
The upshot is that, if anything, market forecasts for economic growth are still being adjusted downwards. That said, today’s upside surprise on German Q2 GDP will have tempered that. It is interesting to note that, despite the downbeat assessment on the economy, the profit situation was judged to be better than one month ago in seven of the 13 sectors for which the ZEW canvasses. The sectors where better profits were seen were: banking, insurance, chemical/pharma, utilities, services, telecoms and technology. Profits were seen much more pessimistically in autos and in engineering.