France and Italy Return to Growth, Recovery Now More Broad-based
After ending the year 2014 on a positive note, the Developed Europe economies gained further momentum in the early months of 2015. Between January and March, the region’s 19-country single currency bloc, the Euro-zone, expanded its GDP 0.4 percent compared to the fourth quarter of 2014 and 1 percent from the year-ago period, recording its fastest pace of growth in nearly two years. Economists and commentators though had expected GDP to increase 0.5 percent for the quarter and 1.1 percent on an annual basis.
But with the region reporting a string of encouraging news and data during the review period, the global financial community was far from disappointed by this slower-than-expected pace of growth. For one, both France and Italy, which have been struggling to participate in the Euro-zone’s economic recovery due to their structural problems, finally shed their ‘laggard’ tags to record impressive growth rates for the first quarter. In fact, thanks to their performance, the Euro-zone saw four of its largest economies clocking growth simultaneously in a single quarter after a long interval, signaling that the Euro-zone recovery is likely more broad-based now.
To add to the optimism, the European statistics agency Eurostat’s individual country reports for the review period indicate that the increased momentum in the Euro-zone economy is now being driven primarily by domestic demand. Indeed, record low oil prices and low interest rates appear to have provided a large boost to consumption in the region. What’s more, the European Central Bank’s (ECB) new 1.1-trillion-euro stimulus program, which was launched in March, appears to have halted the deflationary trends in the region. In April, the Euro-zone recorded zero annual inflation, which brought to an end a four-month-long spell of falling prices. The same month, both Germany and France recorded growth in consumer prices while inflation in Italy remained flat.
At a Glance
Germany: GDP in the country expanded only 0.3 percent from January to March compared to the previous quarter, which had witnessed 0.7 percent growth. The modest growth was achieved on the strength of public and private consumption, as well as higher investment in the areas of construction and equipment.
U.K.: The economy expanded 0.3 percent between January and March, recording its lowest rate of quarterly growth in two years. Exports declined 0.3 percent while services sector activity grew only 0.4 percent, its slowest pace of expansion since 2012.
France: Smashing all expectations, GDP in the country expanded 0.6 percent compared to the fourth quarter of 2014, which had recorded zero growth. This is the fastest pace of growth France has experienced in the last two years.
Italy: During the first quarter, the Euro-zone’s third largest economy expanded 0.3 percent, recording its best quarterly performance in a long time. Although 0.3 percent is a relatively modest pace of growth, it is still the highest rate of expansion the Italian economy has achieved since early 2011.
Spain: Between January and March, the western European economy expanded 0.9 percent from the fourth quarter and 2.7 percent compared to the first quarter of 2014, recording its seventh consecutive quarter of growth since emerging from a two-year-long recession in mid-2013.
GERMANY: GROWTH MOMENTUM FALTERS AS SUBDUED EXPORTS WEIGH ON THE ECONOMY
With all of its large Euro-zone peers like France and Italy recording a strong beginning to this year, the German economy, which has so far held the mantle of being the key growth driver in the single currency bloc, surprisingly faltered during the first quarter. GDP in the country expanded only 0.3 percent from January to March compared to the previous quarter, which had witnessed 0.7 percent growth. The growth data failed to meet expectations. Germany’s Federal Statistics Office has said that the modest growth was achieved on the strength of public and private consumption, as well as higher investment in the areas of construction and equipment.
In contrast, trade turned out to be a drag on the economy as imports increased faster than exports. Overseas sales accounted for nearly half of Germany’s economic activity, but the weaker euro, which has bolstered exports in other parts of the Euro-zone, does not appear to have helped Germany much. This is because 50 percent of German exports are sold within the Euro-zone, where household and business spending is still relatively weak, and key importers of German goods like Russia and Brazil are struggling to revive their own economies.
Against this backdrop, exports have been consistently subdued over the past few quarters while consumer spending has emerged as the key driver of growth for Germany, traditionally an export powerhouse. The good news is that the outlook for consumer spending remains strong in the country. With interest rates staying low on the back of the ECB’s quantitative easing program, saving is unlikely to be an attractive option for Germany’s notoriously tight-fisted consumers, while strong wage growth and high employment levels should continue to boost consumption.
THE U.K.: GROWTH RATE DECELERATES DUE TO SLOWDOWN IN EXPORTS, SERVICES SECTOR
Along with Germany, Britain also experienced a mixed first quarter. The economy expanded 0.3 percent between January and March, recording its slowest pace of quarterly growth in two years. Given that the comparable growth figures for the fourth and the third quarters of 2014 were 0.6 percent and 0.7 percent, respectively, the first-quarter data signal a sharp slowdown in the British economy. Indeed, the U.K. appears to have been hurt by setbacks in several key sectors. For instance, services sector activity, which accounts for two-thirds of Britain’s GDP, grew only 0.4 percent during the first quarter, its slowest pace of expansion since 2012. To put this data into perspective, the sector had registered 0.8 percent growth in the fourth quarter of 2014.
Similarly, British exports declined 0.3 percent in the first quarter as demand from the Euro-zone, Britain’s main trading partner, remained lackluster. Understandably, weak exports have had a negative knock-on effect on the manufacturing sector, which saw activity plunging to a seven-month low in April. In fact, the manufacturing sector, which accounts for 10 percent of the British economy, has been hit by several headwinds, including a strong pound that has made British goods pricier in the global market. Further, owing to subdued oil prices, oil and gas producers based in Britain have severely curtailed investment, which is hurting manufacturers. Encouragingly though, manufacturing activity has picked up lately on the back of strong domestic demand.
On another positive note, retail and consumer spending, which are key drivers of the British economy in the current environment, remain strong on the back of low interest rates, solid wage growth, and a steep decline in inflation. In April, U.K. retail sales grew 1.2 percent from March, their strongest pace of growth since November, and 4.7 percent from the year-ago period.
FRANCE: BEATS EXPECTATIONS WITH A STRONG SURGE IN ECONOMIC ACTIVITY
Between January and March, France registered one of its best quarters in recent memory. Smashing all expectations, GDP in the country expanded 0.6 percent compared to the fourth quarter of 2014, which had recorded zero growth. This was the fastest pace of growth France had experienced in the last two years. According to the national statistics office INSEE, the surge in economic activity was powered by strong consumer spending, besides the external factors that are helping the entire Euro-zone.
Consumer spending increased an impressive 0.8 percent during the first quarter, underpinning the fact that French consumer confidence now is at its highest level in more than five years. Enthused by this change in climate, French businesses appear to be getting ready to increase investment. An INSEE survey of managers in industrial firms indicates that business investment may grow as much as 7 percent this year, its fastest pace since 2011. A case in point is French car maker PSA Peugeot Citroën, which has declared that it will soon increase production to cater to rising demand within Europe.
Given these encouraging developments, the French government has said that it can now beat its 2015 growth target. Its optimism notwithstanding, Paris is now under more pressure than ever before to capitalize on the improved environment and push through pending structural reforms. As a part of its annual recommendations to European Union member states, the European Commission reprimanded France for its structural weaknesses — such as a high debt level, rigid labor laws, and falling export competitiveness — and said that the country must try harder to introduce reforms and ensure that “the ongoing economic recovery is more than a seasonal phenomenon.”
ITALY: ECONOMY RECORDS MEANINGFUL EXPANSION FOR THE FIRST TIME SINCE MID-2013
Following a long period of underperformance, Italy has finally brought some cheer to the global financial community. During the first quarter, the Euro-zone’s third largest economy expanded 0.3 percent, recording its best quarterly performance in a long time for a number of reasons. Although 0.3 percent is a relatively modest pace of growth, it is still the highest rate of expansion the Italian economy has achieved since early 2011. Moreover, the economy had not grown at all since mid-2013 and the first quarter of 2015 marked the end of a long streak of negative or negligible growth. Many factors are acting in Italy’s favor.
For one, with the plunge in oil prices, consumers now have more disposable income. Secondly, the depreciation of the euro has provided a big boost to Italian exports, which account for a sizable component of economic activity within the country. Further, the ECB’s quantitative easing program has kept interest rates low, which is apparently helping households and businesses borrow more. Nonetheless, all three drivers are external factors that are also helping the entire Euro-zone. But given Italy’s structural problems and vulnerability at this stage of its recovery, many commentators and news publications such as the Financial Times have raised doubts about the country’s ability to sustain its current growth momentum only on the strength of external factors.
True, there are tentative signs that both consumption and investment are on the rise. And, indeed, Prime Minister Matteo Renzi’s government has not just provided much-needed political stability to Italy but also has taken steps to implement difficult economic reforms. But, not all the necessary reforms have been implemented and high unemployment continues to be a hurdle for the economy.
SPAIN: GROWTH MOMENTUM INTACT, BUT HIGH UNEMPLOYMENT RATE IS STILL A CONCERN
Spain continues to be the poster child of Europe’s recovery. Between January and March, the western European economy expanded 0.9 percent from the fourth quarter and 2.7 percent compared to the first quarter of 2014, recording its seventh consecutive quarter of growth since emerging from a two-year-long recession in mid-2013. According to Spain’s National Institute of Statistics, the economy benefited primarily from improved domestic demand, higher investment, and better performance of the private sector.
What’s more, the most recent data indicate that Spain is likely to maintain its current pace of growth in the quarters ahead. In April, the country’s composite PMI, which measures activity in both the manufacturing and the services sectors, exceeded its average value for the three months of the first quarter. Similarly, retail sales expanded 1.3 percent between March and April. Given this momentum, it is no surprise that both the IMF and the European Commission have raised their growth forecasts for the Spanish economy, pegging its rate of expansion for 2015 at 2.5 percent and 2.8 percent, respectively.
Still, the outlook for Spain is not entirely rosy. Despite having fallen from its peak level of 27 percent during the recession, the country’s unemployment rate remains staggeringly high at 23.8 percent. What is more discouraging is that Spanish businesses have been increasingly hiring temporary workers to keep costs down. According to news reports, 90 percent of the employment contracts signed in the country during the first quarter were temporary. Consequently, a general feeling of insecurity is growing in the Spanish labor force, which could hurt the economy’s productivity in the long run and consumer spending in the short term.
This article is for informational purposes only. This article is not intended to provide tax, legal, insurance or other investment advice. Unless otherwise specified, you are solely responsible for determining whether any investment, security or other product or service is appropriate for you based on your personal investment objectives and financial situation. You should consult an attorney or tax professional regarding your specific legal or tax situation. The information contained in this article does not, in any way, constitute investment advice and should not be considered a recommendation to buy or sell any security discussed herein. It should not be assumed that any investment will be profitable or will equal the performance of any security mentioned herein. Thomas White International, Ltd, may, from time to time, have a position or interest in, or may buy, sell or otherwise transact in, or with respect to, a particular security, issuer or market on our own behalf or on behalf of a client account.
FORWARD LOOKING STATEMENTS
Certain statements made in this article may be forward looking. Actual future results or occurrences may differ significantly from those anticipated in any forward looking statements due to numerous factors. Thomas White International, Ltd. undertakes no responsibility to update publicly or revise any forward looking statements.
