Eurozone Growth: Should we be worried? - TDS

Hard-data surprises in the euro area have fallen to their lowest level since 2011 in recent weeks, raising investor anxiety over growth and inflation prospects, and consequently on the ability of the ECB to start gradually tightening its expansive monetary policy later this year, according to analysts at TDS.

Key Quotes

“We think that any fear of a renewed downturn in the economy is somewhat over-done, however. While a number of key data releases have come in below expectations (German IP, exports, and retail sales, and IP measures in a number of other key euro area economies), for the most part these sectors are showing a normalisation to trend after months of very strong growth. The euro area manufacturing PMI data shows this clearly: despite declining for three straight months in 2018, the region's PMI remains in elevated territory and in line with its precrisis range, and at well-above 50, suggests expansion in the euro area manufacturing sector will continue, albeit it at a slightly slower pace than in late-2017.”

“Our nowcast models tend to confirm this narrative. On a country-basis, the models suggest a slowdown in 18Q1 GDP growth in Germany, France, and Spain (with an acceleration in Italy). The models suggest a return to trend growth rates, however, rather than a more severe downturn. For the euro area as a whole, a bottom-up Q1 nowcast of 0.4% q/q might sound quite low after a year of 0.6-0.7% q/q growth, but it still lies above its long-term average of 0.3% q/q.”

“Adding noise to the recent data surprises, it is also likely that temporary factors weighed on the data in 18Q1-- weather in particular was severe in February and March in large parts of Europe. German auto production fell particularly sharply in February as well and only partially rebounded in March. If the slowdown in 18Q1 was driven by temporary effects, then the quarter could well be followed by a small bounce in 18Q2, leaving economic growth over the remainder of this year broadly intact.”