Eurozone GDP contraction taking shape

Euro Macro: Incoming data suggest contraction in Q1 GDP with composition shifting – Economic data for the eurozone and Germany that was published during the past few days indicate that eurozone GDP contracted in 2023Q1 but also that the composition of growth has changed compared to 2022Q4. To begin with, data for retail sales and car registrations in the first two months of this year show that the contraction in private consumption that began in Q4 probably continued in Q1. This would also be in line with recent changes in consumer sentiment, with overall sentiment increasing during the period January-March, but with the propensity to carry out major purchases falling and staying at historically low levels. Also private consumption will be limited by the drop in house prices that took off in 2022Q4 (-1.7% qoq – the sharpest quarterly fall since the start of the series in 2005). Falling house prices tend to limit expenditure on furniture etc, but the main impact on consumption is via wealth effects, as households tend to replenish wealth by higher savings. Of course the general deterioration in the economic outlook and other wealth effects from tightening financial conditions on the back of central bank rate hikes also play a role here. Eurostat recently has also published data for household income and the saving rate in Q4, which showed that the saving rate increased in Q4 for the first time since the first wave of the pandemic in 2020.

Next, fixed investment in machinery and equipment probably rebounded in Q1, after it contracted in Q4 (-1.6% qoq). This was pre-signalled by a sharp rise in Germany’s orders for capital goods from other eurozone countries. Indeed, Germany’s total factory orders jumped higher by 4.8% mom in February, with orders for capital goods placed by other eurozone countries rising by almost 16%. The less volatile 3Mo3M change in capital goods orders from other eurozone countries came in at +6.1% in February, whereas the comparable change in orders for consumer goods from other eurozone countries came in at -3.3%, which would be in line with the expected contraction in private consumption as mentioned above. Although the jump in Germany’s orders bodes well for Germany’s industrial production and exports, it seems that most of the exports will remain within the eurozone, and therefore will not result in higher exports for the region as a whole. Indeed, eurozone exports fell by 1.1% in January, whereas Germany’s exports rose by 2.5% that month.

In contrast to the expected rebound in investment in machinery and equipment, investment in housing and buildings is expected to continue to contract in Q1 (it already declined in 2022Q3 and 2022Q4). Whereas mild weather conditions probably have stimulated construction activity in Q1, underlying activity in the sector has remained weak, as was also illustrated by further drops in the PMI for the construction sector in Germany, France and Italy in March (all to levels well below the boom-bust level of 50).

Finally, net exports probably contributed less positively to GDP growth in 2023Q1 than in 2022Q4 (+ 0.9pps qoq),when imports contracted sharply while exports were roughly stable. We think that exports probably increased somewhat in Q1 but that imports also picked up, meaning that, on balance, net exports had a more neutral impact on overall GDP growth in Q1.

Adding everything up, we think that incoming data are in line with our base case for the eurozone economy of moderate contractions in GDP during most of this year, starting in Q1. Indeed, the impact of the aggressive interest rate hikes by the ECB are starting to kick in and will continue to build up in coming quarters.