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Economy in Brief

Euro-Growth is a Tick Weaker in 2008-Q1
by Robert Brusca July 9, 2008

Euro Area GDP grew by 0.7 percent (simple Q/Q rate; also 2.9% saar) in the first quarter from the fourth quarter, and was up 2.1 percent year on year. The figures show a downward revision to provisional figures reported on June 3. Eurostat provisionally had put first quarter growth at 0.8 pct quarter on quarter and 2.2 pct year on year. The revisions themselves are small and inconsequential but hint at things to come…

Government can only do so much…

The data in the table below shows that government spending slowed in Q1 on a Yr/Yr basis but sped up Q/Q. A number of Euro-members are having to be careful with fiscal outlays and mindful of the constraint the EC Commission imposes on deficits relative to GDP, especially as GDP slows. Even a strong quarter’s worth of government spending did not boost the Yr/Yr result for the sector or maintain GDP growth overall.

Domestic demand is slowing despite a good quarter

Domestic demand slowed in the zone Yr/Yr but surged in its Q/Q growth. Here the Yr/Yr trend is more telling since domestic demand has been tracing out a saw-tooth irregular pattern over the past four quarters on a Q/Q basis. After posting Yr/Yr quarterly growth rates of 2% or more in recent quarters domestic demand dipped to 1.6% in 2008-Q1. In various EMU surveys the consumer sector continues to come up as very weak. It has grown at a seemingly stable Yr/Yr pace of 2.1% for the last two quarters while, in reality, the last two quarters of growth on a quarterly basis were a very weak minus 0.3% (saar) in 2007-Q4 and a still anemic 0.7% (saar) in 2008-Q1.

Capital spending trends show some resilience but are still challenged

Capital spending has been erratic as well. But at 2.9% Y/Y it is only barely the weakest quarter in the past four. In quarterly growth capital spending surged in Q1 and that may have had more to do with the good weather than with economics. The surge abuts a very weak 1.6% growth pace for 2007-Q4. Its erratic nature makes its trend hard to pin down. In surveys of industrial orders, however, it is clear that the capital goods sector remains the strongest in the euro economy but even it has begun to lose upward momentum.

Trade softens

Trade continues to augment GDP but its contribution to Q1 growth (Q/Q) was negative as the net export position turned negative and registered a sharp slowdown from the previous quarter. Export growth and import growth each made strong gains from the previous quarter as imports grew faster, but Yr/Yr exports still have the edge and on that basis trade boosted GDP growth again.

Got recession?

If imports continue to gain on exports as consumer demand is fading the Euro Area could be challenged to maintain growth. In such an environment it would be difficult to see capital spending holding up and the capital goods sector is still the stalwart of the Euro Area. But capital spending needs a reason and the reason in Europe is fading as the currency is too strong to support export sales and domestic demand is faltering, hampering domestic investment. On top of that, overall world demand is simply slowing. The EMU economy is slowing too and it is reasonable to ask if it will tip into recession, especially given the ECB’s overriding concerns about inflation. We may soon see if the ECB is very serious about its recent cautioning since has noted that the risks to growth are on the downside. Indeed, they are.

European GDP EU-15
    Consumption Capital Formation Trade  Domestic
  GDP Private Public Total X
Housing X-M:
blns E
Exports Imports Demand
% change Q/Q; X-M is Q/Q change in Blns of euros
Q1-08 2.9% 0.7% 1.8% 10.2% 10.9% 8.4% -0.1 7.9% 8.3% 3.0%
Q4-07 1.5% -0.3% 0.6% 1.6% 2.0% 0.6% 5.8 1.7% -1.0% 0.3%
Q3-07 2.6% 2.1% 2.3% 6.3% 8.1% 1.4% -2.4 8.4% 10.0% 3.1%
Q2-07 1.4% 2.5% 0.9% -5.9% -6.2% -5.2% 5.9 3.9% 1.1% 0.2%
% change Yr/Yr; X-M is Yr/Yr change in Gap in Blns of euros
Q1-08 2.1% 1.2% 1.4% 2.9% 3.5% 1.2% 9.2 5.5% 4.5% 1.6%
Q4-07 2.2% 1.2% 2.0% 3.9% 5.5% -0.1% 4.4 4.4% 4.0% 2.0%
Q3-07 2.7% 1.8% 2.5% 3.0% 3.7% 1.0% 9.2 7.1% 6.1% 2.2%
Q2-07 2.6% 1.8% 2.3% 3.3% 3.8% 1.7% 7.8 6.0% 5.2% 2.2%
5-Yrs 2.2% 1.6% 1.8% 3.6% 3.8% 3.2% 0.5 6.0% 5.8% 2.1%
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