Week Ahead/in Review: GDP surprises on the upside, but remains weak

Week in review: Euro Area GDP growth edged up 0.2%qoq in Q3 2014 after 0.1%qoq in Q2 (0.8%yoy, the same as in Q2), a tad above consensus but confirming that the weakness in activity that started in the spring persisted in the summer and in the early fall. The country breakdown shows GDP was 0.1%qoq in Germany (after -0.1%qoq in Q2), 0.3%qoq in France (after -0.1%), -0.1%qoq in Italy (after -0.25) and 0.5%qoq in Spain (after 0.6%). Germany and Italy are therefore the two major sources of concern for Europe,the first because the data suggests that Europe’s growth engine has grounded to a halt, and the second because Italian output has failed to record a quarter of growth since 2011. The countries that emerged from an adjustment programme have done better. In particular, Greece’s GDP was up 0.7%  and Spain continued to expand, showing that the recovery is well underway .

Today’s data may relieve some of the pressure from the ECB to expand its quantitative easing programme to sovereign debt. However, the numbers also suggest that the European economy is fairly lackluster, which means that the ECB is definitely not off the hook yet. In stark comparison with the Euro area, UK GDP grew 0.9%qoq (3.2%yoy) in Q3 after 0.7% in Q2 and the US economy expanded 1.1%qoq (2.6%yoy) after 0.9%qoq in Q2.

In Portugal, GDP growth declined to 0.2%qoq after 0.3%qoq in Q2. Comparing with the same quarter of the previous year, GDP grew 1% after 0.9% in Q2. The slight increase in quarterly growth was mainly driven by private consumption, namely from resident households, according to the National Statistics. High frequency indicators such as industrial production and international trade in goods were already pointing to a rough stagnation in Q3. In order to accomplish the Government’s Budget 2015 forecast for GDP in 2014 (1%), the country will need to grow more than 1%qoq in Q4. Inflation in Portugal was flat in October, a small improvement after eight consecutive months of declines.

Week ahead: After better than expected news on GDP in Q3, this week will see the fist activity indicators for Europe in November.

  • 19 November: FOMC minutes – The Federal Reserve’s OMC meeting minutes should provide further insights as to the timing  of the first rate rise. The strength in the labour market should convince the Fed to raise rates by the spring.
  • 20 November: Euro area flash November PMIs: The PMIs record actual conditions on production, orders, prices and employment in the manufacturing and services sectors. Markets anticipate the Euro area composite PMI to remain broadly stable at just above 52, which is consistent with positive, yet below trend growth in GDP.