Eurozone Exits Recession in Q1

Eurozone Exits Recession in Q1 

In the beginning of the year, the Eurozone economy saw a growth of 0.3% quarter-on-quarter, which surpassed expectations, following two quarters of slight contraction. Spain led among the major member states with a remarkable growth of 0.7% quarter-on-quarter, while Germany, France, and Italy all showed similar growth rates, with Italy at 0.3% quarter-on-quarter and France and Germany at 0.2% quarter-on-quarter. Notably, Germany's growth followed a downwardly revised -0.5% quarter-on-quarter in the fourth quarter of 2023.

While a detailed breakdown of expenditure components is not yet available, initial data from the largest member states indicates a positive contribution from net foreign demand. Additionally, investment increased in France and Spain, with Germany highlighting construction investment as a positive aspect. However, consumption negatively impacted growth in Germany, while it contributed positively in both France and Spain. Italy's statistics office mentioned that overall domestic demand had a negative contribution, while net foreign demand was positive.

Data on the supply side performance is more mixed and limited. Northern member states saw poor performance in the industry sector, while construction improved and services accelerated. In the Southern Eurozone, all sectors made positive contributions, with Spain's industrial sector showing a strong acceleration. Overall, the Q1 GDP report suggests an economy transitioning to recovery, but the rate of expansion might not be as robust as suggested by these data.

Regarding the outlook, the pace of Eurozone recovery has been faster than anticipated, raising questions about whether this indicates a fundamental underestimation of the economy's strength or merely a timing issue. Surveys show a mixed picture, with the Purchasing Managers' Index (PMI) indicating recent improvement in activity, while the European Commission's Economic Sentiment Indicator (ESI) suggests the recovery phase may have passed, entering a stabilization period. Manufacturing remains a weak point, with new orders declining rapidly in April.

Looking ahead, quarterly growth is expected to hover around 0.3% in the coming quarters, with consumption benefiting from job security and improving real wage growth. However, tight labor markets may limit employment and consumption growth. Investments may continue to be impacted by high interest rates and fiscal tightening in some countries, although falling long-term rates and available NGEU funds should provide support. External demand growth is expected to remain sluggish due to underlying weaknesses in China and projected mild recession in the US in the second half of the year.

In terms of inflation, April figures for the Eurozone were in line with forecasts, with headline inflation remaining at 2.4% year-on-year and core inflation declining slightly to 2.7% year-on-year. Energy inflation increased, while food inflation picked up after previous declines. Overall, the last stretch of recovery may prove to be the most challenging, especially with the rebound of both core and services inflation in April.