Eurozone GDP: Hitting bottom?

Santander Research | The performance of the Eurozone economy in 2018 was far from meeting expectations. Having exceeded expectations in 2017, with GDP growth yoy of 2.5% – the strongest since the 3.1% in 2007 – the economy registered a strong slowdown in 2018 with caused up to a 1.8% fall yoy in GDP. Although, probably, the growth levels of 2017 were not sustainable – taking into account the economic fundamentals of the Eurozone and the performance of the rest of the world – , the economic slowdown was strong, especially in the second half of 2018. In quarterly terms, GDP went from growing a quarterly average of o.7% in 2017 to only 0.4% in the first half of 2018 and a quarterly average of 0.2% in 2018.

Although we can argue that diverse temporal factors negatively affected growth in 2018 and, in some cases, will continue to do so in the first half of 2019, it seems that the adjustment in growth rates has been more aggressive and much worse than expected. In addition, the risks and uncertainty, generated by issues as important – and destabilizing – as Brexit, the commercial negotiations with the US and the political situation in some countries, remain there and will continue to affect growth rates by delaying both consumption and investment decisions.

In this negative growth environment, the consensus forecasts have suffered a strong adjustment. Thus the forecasts for GDP growth in 2018 were revised from 1.5% in 2017 to almost 2.5% in the first half of 2018 to again 1.8%. Curiously, not all countries show the same performance. The forecasts for Spanish GDP were upgraded strongly to end in levels above the initial forecasts. In the case of Germany and France, the data recovered practically the levels of the initial forecasts. However, in the case of Italy, the adjustment in the forecasts has been significant: the GDP forecasts were revised to highs of 1.5% from the previous 1.0%, but ended the year in levels below the initial forecasts.

The adjustment in the data for 2019 has been strong and, basically, follows the same pattern as 2018 in terms of revisions by countries. The GDP forecasts for Spain remain in high levels; in the case of Germany and France¡, the fort¡casts have been downgraded to, practically, the initial levels; and Italy has seen teethe forecasts for economic growth fall heavily. In out opinion the GDP forecasts for 2019 have more to do with the negative impact of the data for the second half of 2018 in the data for 2019 than with a greater deterioration in 2019.