EMU GDP Continues Strong Year-on-Year Pace

European Monetary Union (EMU) GDP growth logged a 0.8% gain in the first quarter of 2022 after rising by 1.2% in the fourth quarter of 2021. Both are annualized quarterly rates of expansion. The year-over-year growth rate in the first quarter of 2022 sits at 5%. This growth rate is substantially because of the extremely strong growth rates of over 9% logged in the third quarter of 2021 and the second quarter of 2021.

Beginning with Q2 2022 data, these very strong growth rates are going to begin to fall out of the year-over-year calculation and, at that point, we will start looking at annualized European growth rates that are going to be a little bit more like the annualized quarterly rates that we see in the table below. For the last two quarters, for example, we are seeing GDP average something more like 1% at an annual rate. However, having two quarters out of four with quarterly growth rates over 9% right now pushes the annual rise in GDP up very strongly.

The annual growth rate for the EMU shows 5% growth in the first quarter of 2022, up from 4.7% in the fourth quarter of 2021 and from 4.1% in the third quarter of 2021. That compares to a second quarter year-over-year growth rate at a 14.6% in the second quarter of 2021.

Obviously, what we're seeing now is the transition away from those COVID-affected growth rates. Comparisons with the weak readings of GDP during the period of COVID are falling by the boards; however, the strong rates posted in the expansion after the COVID recession are still embedded in the year-over-year calculations. They are still affecting substantially the year-over-year growth rates; meanwhile, the last two quarters are showing us European growth that is coalescing at a 1% annual rate

Yet, even with these lower growth rates of GDP, inflation in Europe continues to flare strongly. The European Central Bank still has a job to do. And based on the way GDP is evolving, it doesn't look like the excessive growth rate in GDP is to be blamed for the inflation pressures that have developed in Europe and have lingered. Supply chain problems, war, food scarcity and other industrial dislocations appear to be at work.

Among the early six reporting European Monetary Union members, only Portugal is really knocking down eyepopping growth rates. Portugal had first quarter 2022 GDP growth at a 10.8% annualized rate, up from a 7% pace in the fourth quarter and that compares to an 11.2% pace and the third quarter of 2021. However, two EMU members, France and Italy, log GDP declines in the first quarter with France's quarterly GDP declining at a 0.2% annualized rate and Italy's GDP declining at a 0.7% annualized rate.

The four largest EMU members (Germany, France, Italy, and Spain) grew at a pace of 0.3% annualized in the first quarter of 2022 and that compares to a 2.1% annual rate in the fourth quarter of 2021. For the rest of EMU, growth in the first quarter came in at 2.1% pace compared with a decline at a 1.4% annual rate in the fourth quarter of 2021. Both the four largest economies and the rest of the EMU had extremely strong rates of growth and the third quarter of 2021.

Year-over-year growth rates for the countries in the table are still quite strong. For the most part, they were in the 90th percentile or higher in their queue of annual growth rates back to late-1997. The exception is Germany whose growth rate is only at the 85.9 percentile; that's a minor exception although it is the European Monetary Union's largest economy.

There is some impact from the Ukraine-Russian war during this period since the war started late in February and we have monthly data that show us that March was a month that exhibited some noticeable setbacks in various economic components as that war began. The likelihood is that in the second quarter of 2022 we see more disruption from the war influencing GDP growth – and that likely means a knock-on impact boosting inflation as well. After the U.S. reported its weak growth GDP result earlier in the week, we saw fixed income markets react positively as investors are beginning to reassess how strong growth is going to be and how much monetary policy is going to have to move in order to either knock down inflation or to start a recession. Talk about recession is becoming more widespread. Markets are finding fewer true believers that the Fed will be able to draw to an inside straight, raise interest rates, bring inflation down, and keep growth on track. As for the ECB, its challenge is not any easier although its inflation rate isn't as high as in the U.S. Still, Europe is going to face considerable growth challenges with the war raging on its very doorstep. The outlook for growth and for policy remains as chaotic and uncertain as ever.