The Eurozone Joins The “Weak Q1” Club

Eurozone GDP growth in Q1 reached +0.4% on a quarterly basis vs a consensus of 0.6%Eurozone GDP growth in Q1 reached +0.4% on a quarterly basis vs a consensus of 0.6%

Eurozone GDP growth in Q1 arrived in line with a GDP tracker at +0.4% on a quarterly basis estimated by AXA IM strategists (versus a consensus of 0.6%) and reflected “the weakness in industrial production in several member states during January and February, ” according to them. This was partly because temperatures were warmer than seasonal averages across Europe which in turn reduced consumption and production of energy.

For the research house, with France growing at 0.3%, Germany probably at 0.4% and Italy at 0.2%, this GDP print “is arguably far below what business surveys were promising a couple of months ago.”

Most of this growth misstep should prove temporary as the weather – related issue has already receded, while business surveys have remained at fairly elevated levels. As a result, we have modestly revise d our Eurozone GDP forecast for 2018 down to 2.5% , from 2.7% while the consensus presently stands at 2.3% , Exhibit 4 ).

After a worrying retracement in March, the EMU Purchasing Managers Index ( PMI ) rose again in April, from 56.6 back up to 58 (consistent with more than 3% growth), while still remaining below the 12- year high reached in January. The picture is reflected via a wider range of national business and consumer surveys. In AXA IM’s view, this means that 2018 Q2 -Q3 should see “a sequential acceleration of real GDP”.

Indeed from a demand perspective, we remain confident of strong, domestic momentum with the on- going resorption of the labour market slack across member states, modest inflation and (limited) wage acceleration supporting purchasing power.

Meanwhile, April inflation rebounded to +1.4% while core inflation remained stable at 1%. The Easter-induced rise in services (+0.2pp month- on- month ) was offset by a decrease in manufactured goods ( -0.3 percentage points ). In this broadly unchanged macroeconomic context and with expectations already in line with the European Central Bank’s (ECB ) intention, its April meeting provided little news. Once again, ECB President Mario Draghi confirmed the on- going policy normalisation while insisting on its progressivity and data conditionality.

In opinion of AXA IM’ s analysts, the next move will occur in June or July (depending on incoming data and potential external evolutions) with the ECB announcing the phasing out of its asset purchasing programme and moving forward guidance to interest rates.

We expect the ECB to emphasise the distinction between the (partial) normalisation of the deposit rate and a “full” hike. As the market has already priced in the former, the ECB may want to reduce its negative impact on banks’ excessive reserves. However the latter will have to wait beyond mid -2019 and remains dependent on the macroeconomic data flow.