W Europe: Mixed GDP Signals But Downside Risks Still Lie Ahead
French GDP data surprised on the upside in Q2, but the pick-up in growth to an apparently-impressive 0.5% q/q masked a further drop in domestic demand. Meanwhile, GDP growth eased a notch to 0.4% in Spain and was flat in q/q terms in Germany, both apparently benefiting from better consumer readings. Altogether the various Q2 GDP numbers data suggest EZ Q2 growth (data due Monday) will match consensus thinking at around 0.2%, actually a notch below ECB estimates. But the ECB is clearly more mindful of downside risks now materializing and will thus be more worried about growth numbers in H2, also accepting that this bleaker outlook may weigh on inflation more than previously thought.
While French GDP data surprised on the upside in Q2, this pick-up in growth to an apparently-impressive 0.5% q/q masked a further drop in domestic demand. Meanwhile, GDP growth eased a notch to 0.4% in Spain and was flat in q/q terms, both apparently benefiting from better consumer readings. Altogether the data suggest EZ Q2 growth (data due Monday) will match consensus thinking at around 0.2%, actually a notch below ECB estimates. But the ECB is clearly more mindful of downside risks now materializing even if it is coy about attributing then to its tightening cycle. Thus the ECB will thus be more worried about growth and overall activity numbers in H2, also accepting that this bleaker outlook may weigh on inflation more than previously thought. In addition, a likely recovery in imports (still largely absent in the Q2 details so far visible, will add to downside GDP risks into 2024.
Resilient Q2 But Risks Still Growing
Clearly the array of national GDP data suggest that the small q/q drop we envisaged for Q2 EZ GDP will not occur, at least in the flash estimate due on Monday - No details comes with these flashes and they are prone to clear revisions. Indeed, the original Q4 and Q1 GDP numbers gave a clearly misleading impression, in that they implied initially modest growth in both quarters, only for the opposite picture now the case!Regardless, the likely Q2 EZ outcome of 0.2% makes the likely 2023 picture a little firmer that hitherto thought, albeit with the downside risk the ECB implied and which are being flagged by recent data, arguing for a softer H2 picture in which GDP declines are a high possibility. Altogether, the outlook is for 2023 GDP growth of some 0.3%, up 0.2 ppt from our previous estimate but still only a third of the the ECB’s current official estimate points and with little improvement seen into 2024, so that growth next year may be a quarter of the 1.5% the ECB projects.
Swedish Shock
The main downside surprise came in Sweden where GDP estimates (very much prone to revision) not only pointed to Q2 GDP contracting by 1.5%, ie three times consensus thinking, but with the level of GDP now estimated to be some 1.3 ppt lower than previously estimated. The data will therefore have reverberations in the Riksbank. It suggests a much weaker 2023 GDP picture than the 0.2% drop pencilled in by the Riksbank last month. Inter-related, it also implies that the upgrade made at that time to suggest a positive output gap for this year needs to be revised back, thereby adding to potential downward pressure on inflation.