Eurozone GDP: Spain roars, Germany coughs

Euro area real GDP grew by 0.3% quarter on quarter (qoq) in Q2, above our forecast (+0.1) and consensus (+0.2%). Core countries alternated between poor (Germany and Austria respectively at -0.1% et 0%), to decent growth (France and Belgium at +0.3% and +0.2). But the main surprise came again from Spain with an astonishing performance (+0.8%) while Italian growth was also decent (+0.2% after +0.3% in Q1). Finally, we had two opposite but interesting surprises with Ireland rising by a strong +1.2% qoq while Portugal ran out of steam (+0.1% after +0.8%). 

We had highlighted that Q1 GDP growth was artificially higher due to an unusual construction in Germany and Italy (to normalize in Q2) while domestic demand was weak. Such pattern is still true in almost all countries, but euro area GDP growth finally reaches +0.3%, boosted by a buoyant Spain (worth 0.1pt of total euro area growth). 

After tentative of rebound in Q1 - confirmed at +0.3% - today's figures shows that the road to a truly sustainable recovery will be a long and sinuous path. It could even be delayed in Q4 after July surveys reported another weak start for Q3 in core countries, particularly for Germany and France.

Unless services inflation were to surprise on the upside in July and/or August, such environment should facilitate a consensus for a 25 basis points cut between Governors for the next ECB meeting scheduled on 12 September. Indeed, as supply shock is fading and weak demand becoming increasingly evident, the argument to maintain policy rates in such restrictive territory is lower.

France

French Q2 GDP came at 0.3% qoq, slightly above our own estimate of +0.2%. Previous quarterly data have also been revised higher by 0.1pt, reaching +0.3% in Q1 and +0.4% in Q4 last year. The GDP growth carry over (assuming no more growth for the rest of the year) is now at 1%, in line with the French government objective.

According to INSEE preliminary data, domestic demand is weak with no growth for private consumption (+0% from -0.1% in Q1), but slightly in positive territory thanks to investments that came at +0.1% (after -0.4%). Net trade was the main contributor (0.2pts) with exports rising by a strong +0.6% (after +0.7%) while imports were flat. 

Looking forward, snap legislative elections in France have impacted business and household confidences. Despite the fact that none of the worst-case scenarios have materialised, uncertainty remains high and is likely to weigh in coming months as some business need some clarity and continuity. Last but not least, we believe the expected boost on real GDP from the Olympic Games is overestimated and should be compensated by a crowding-out effect, quite usual on these events (less tourists in Paris before the Olympic Games, France as a destination became much more expensive, reducing arrivals in other regions…etc). We believe our +0.2% for Q3 are slightly tilted to the downside, and most recent surveys (PMIs and INSEE) have not reassured in July.

Germany

After a surprising +0.2% qoq in Q1 (boosted by a rare uptick in construction sector during winter), real GDP growth normalised and came at -0.1% in Q2. It was broadly in line with our expectations (0%, consensus: +0.1%) and highlights how Germany is struggling to recover. Destatis doesn't provide more details at this stage, but we wouldn't be surprised if the weakness comes from lack of recovery in domestic demand, particularly from investments (Destatis reported “that investment in machinery and equipment and construction decreased”) and limited improvement from private consumption while net trade should only be able to compensate, not helped by weak demand from China. Looking at the supply side, the weakness in the manufacturing sector is very striking with industrial production declining by around 1.5% qoq (we're still missing June figure), remaining around 8% below its pre pandemic level (in real terms).

The services sector has probably avoided a disastrous Q2 with surveys behaved better in Q2 (above 50 thresholds for PMI, above Q1 average for Ifo but without strong momentum) but this has likely proven insufficient as manufacturing sector failed to follow through on the (weak) signals of recovery seen at the start of the year. Those surveys were even more worrying in July, pointing to a severe drawdown for manufacturing sector while services activity is less supportive than before. For the time being, Q3 GDP carry over is negative. We will wait for Q2 GDP details but our +0.2% qoq for Q3 and Q4 may have to be slightly revised down.

Italy and Spain:

Italy and Spain came respectively at +0.2% qoq (-0.1pt from Q1) and +0.8% (same pace than Q2), above our forecasts (+0.1% and +0.5%). 

For Italy, Istat provides general comments, highlighting a positive contribution from the domestic component (gross of inventories) and a negative contribution from the net foreign component. The GDP growth carry over for 2024 is 0.7%. We had forecast a sharp fall in housing and construction due to the end of the Superbonus (a 110% tax credit for home energy renovation), offset by a gradual recovery in private consumption and NGEU funds flowing into domestic investments (private and public). Excluding the gyrations of Superbonus in Q1 and Q2, we believe Italian GDP is improving slowly but surely. We will await details of GDP, but at first sight, our forecast of +0.2% for Q3 and Q4 remains valid.

Spain roars again. INE released detailed GDP figures with domestic demand contributed 0.3points and external demand 0.5pts. In details, both private consumption and investments rose by +0.3% qoq. Exports rose by an astonishing +1.2 while imports registered a rate of -0.2%. We lack the details on exports at this stage, but we suspect tourism spending (accounted in export services) was still a major driver of Spanish buoyant economic activity.  On the supply side, all the large sectors presented positive rates in their value added, a clear contradiction with Germany. We remain bullish on Spain for the rest of the year (+0.6% in Q3 and Q4).