Spain: Economic Snapshot for the Euro Area
Growth continues to sputter in Q4
Preliminary estimates revealed that the Eurozone continued to grow at a slower pace in the final quarter of 2018, rounding out a year that saw growth go from strong to moderate. According to Eurostat, GDP increased a seasonally-adjusted 0.2% quarter-on-quarter in the fourth quarter, matching the third quarter’s reading. While a detailed breakdown of national accounts is not yet available, a weak industrial sector and shaken confidence likely drove the lackluster result. The economy has slowed notably since 2017’s robust recovery, with growth falling to 1.8% in 2018 from 2.4% the year prior.
Looking at the region’s largest economies, Germany narrowly avoided a technical recession in the fourth quarter, eking out flat growth. Poor car production since the introduction of new emissions-testing standards along with weak external demand dragged on growth, although a rebound in government consumption and solid fixed investment growth helped offset the damage. France’s momentum managed to hold up, however, despite the ‘gilets jaunes’ protests, thanks to surprisingly upbeat export growth. Spain’s economy, meanwhile, continued to grow robustly in the fourth quarter, aided by a tightening labor market. In contrast, Italy was once again a weak link in regional growth: The economy stumbled into a technical recession in Q4, likely hampered by poor domestic demand amid plunging industrial production, financial market volatility and political risk souring confidence.
Elsewhere in the region, dynamics were mixed. Preliminary data revealed that growth picked up in Cyprus, Lithuania, the Netherlands and Portugal. In contrast, activity lost steam in Austria and Latvia, while growth was unchanged in Belgium in Q4.
Available data for the first quarter of 2019 suggests that the economic slowdown seen in the second half of 2018 has carried over into the start of 2019. The manufacturing PMI slipped into contractionary territory in February for the first time since mid-2013, suggesting that the sector continues to reel from delayed automobile production and other shocks. Economic sentiment hit a new over two-year low in January and an uncertain environment continues to loom over the outlook. U.S. President Donald Trump’s threats to levy tariffs against the EU’s automotive sector lurk, unless a favorable trade deal is struck. Progress between the two sides to reach an agreement has thus far been stunted, while, Brexit is quickly approaching without a deal in place. Moreover, broader concerns over global growth persist, despite some signs of progress in trade talks between the U.S. and China.
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Prospects chopped for fourth consecutive month
The Eurozone’s 2019 growth forecast was chopped again this publication following the tepid end to 2018. Weaker growth momentum at the end of the year is seen spilling over and weighing on growth this year. Downbeat sentiment and the ongoing problems in the automobile sector will likely weigh on activity, especially in the first half of 2019, and political concerns linger, especially regarding Spain’s upcoming elections and Italy’s unlikely coalition government. That said, headwinds to growth are seen moderating somewhat by year-end. Industrial production is expected to normalize after one-off shocks, while external political uncertainty could also take a step back if the EU and the UK finalize a way forward in March and if the U.S. and China strike a trade agreement.
The Eurozone economy is seen growing 1.4% this year, which is down 0.1 percentage points from last month’s forecast. A solid labor market and accommodative monetary policy will continue to drive growth, while consumers should also benefit from contained inflation and lower-than-expected oil prices. Risks to the outlook remained skewed to the downside, most owing to external factors such as rising global protectionism and a sharper slowdown in China’s economy. In 2020, growth is seen stable at 1.4%.
Seven of the Eurozone’s economies had their 2019 forecasts cut this month, including Germany and Italy. Malta was the only economy to see its outlook lifted, while the remaining countries saw no changes to their growth prospects.
GERMANY | Economy dodges recession in Q4
Germany narrowly avoided a technical recession in the fourth quarter, with economic growth coming in flat. This followed the release of full-year national accounts that had indicated a small rebound in Q4. The economy was nonetheless buttressed by domestic demand due to stronger fixed investment and public expenditure growth, while private consumption picked up slightly. The external sector, meanwhile, dragged on economic growth despite ending the year on a positive note in December. Looking ahead, a rebound in the first quarter of this year looks to be on the cards: Consumer sentiment picked up again in February, while the composite PMI continued to indicate improving business conditions in January and February. Business sentiment, however, remained somewhat pessimistic in the same period.
Robust domestic demand should support the economy this year. Notably, public consumption should pick up as the government pursues a more fiscally expansionary budget, while a strong labor market and an increase to the minimum wage should fuel household spending. However, global trade tensions, a slowdown in China and a possible disorderly Brexit cloud the outlook. FocusEconomics Consensus Forecast panelists expect the economy to expand 1.3% in 2019, down 0.1 percentage points from last month’s forecast, and 1.5% in 2020.
FRANCE | Growth stable in Q4
Fourth-quarter growth was modest but stable from a quarter earlier, landing roughly in line with analysts’ expectations. Domestic demand was rocked by last year’s ‘gilets jaunes’ protests; household spending stalled amid the demonstrations, while fixed-capital spending was hit by a drop-off in household investment. Notably, corporate investment was up despite growing uncertainty. External demand, on the other hand, was upbeat and helped offset the squabbles at home. Particularly, export growth jumped on the euro’s weakness against the dollar. Looking ahead, consumer confidence recovered somewhat at the outset of the current quarter. Business confidence, however, has been more downbeat on the industrial sector’s pullback. In politics, President Emmanuel Macron’s ‘grand debate’ put him back on the front foot in recent weeks and appears to have salvaged, for now, his sorely-needed economic reforms.
FocusEconomics analysts expect the economy to push past last year’s ‘gilets jaunes’ protests thanks to resilient fixed investment and Macron’s recently-promised fiscal measures. Economic sentiment, meanwhile, will take time to recover. External-sector risks have tilted to the downside in recent months as France’s biggest trading partners grapple with cooling economies. Growth slowed to 1.5% last year, and analysts remain downbeat on the coming quarters; they see growth at 1.4% this year and next, both of which are unchanged from last month’s forecasts.
ITALY | Economy limps into third recession in 10 years
The economy slipped into technical recession for the third time in a decade in the second half of 2018, contracting even more sharply in the fourth quarter than it did in the third. Shrinking domestic demand was the culprit for the gloomy showing. Particularly, business sentiment was likely hit by erratic and interventionist government policies, as well as by financial turbulence, while substantial stagnation in job creation—following the introduction of stricter recruitment rules—hurt private consumption. The economy seems set to record another poor economic performance in the first quarter of 2019: In January, business confidence declined further, while the manufacturing sector dived deeper into contractionary territory; and the recent weakening in credit provision also bodes poorly for the economy. At its latest review of the country on 22 February, Fitch Ratings downgraded Italy’s rating to BBB- with a stable outlook, underlining the challenges currently facing Italy’s economy.
The economy is poised to continue to splutter this year, with GDP growth expected to be the slowest in the EU due to anemic domestic demand and a deterioration in the external environment. Policy uncertainty, a less favorable tax regime and higher interest rates will depress fixed investment growth, while deteriorating employment dynamics and muted productivity growth will weigh on consumer spending. The huge public debt burden, spendthrift policies and the possibility of more financial turbulence further cloud the outlook. FocusEconomics panelists project growth of 0.4% in 2019, which is down 0.3 percentage points from last month’s projection, and 0.8% in 2020.
SPAIN | Snap elections called for April
The economy gained steam in the final stretch of 2018 as quarterly growth in Q4 picked up a notch from a solid Q3 outturn, sharply contrasting the mediocre performance in the Eurozone overall. The pick-up was largely underpinned by a strong rebound in exports and multi-year high growth in public spending. Slower private consumption and a contraction in fixed investment weighed on the headline figure, however. Meanwhile, available data suggests that the solid momentum carried over into 2019: In January, the composite PMI hit a seven-month high, largely reflecting improved business conditions in the manufacturing industry, while economic sentiment bounced back from an over two-year low. In the political arena, on 15 February, Prime Minister Pedro Sánchez called a snap general election for 28 April after Catalan pro-independence parties, which had backed his government previously, joined with the opposition to reject his draft 2019 budget two days earlier.
Growth is seen slowing this year as the current economic cycle matures. Private consumption is set to ease as employment growth slows and wage gains moderate, while investment activity could be dampened by tightening financial conditions. In addition, the vital tourism industry has reached its peak and is set to cool going forward, posing a major headwind to job creation and economic activity overall. Heightened political uncertainty over the outcome of the general election and its repercussions on economic policy also cloud the outlook. FocusEconomics panelists project growth of 2.2% in 2019, which is unchanged from last month’s estimate, and 1.8% in 2020.
MONETARY SECTOR | Inflation falls to nine-month low in January
Complete data confirmed harmonized inflation moderated to 1.4% in January, below December’s 1.5% and the lowest reading in nine months. As a result, inflation lies further below the European Central Bank’s target rate of near but under 2.0%. Lower price pressures for energy, after the initial impact from higher oil prices faded, drove the fall.
At its January meeting, the ECB kept to its plan and left its monetary policy and forward guidance unchanged. However, at the same time, it struck a more downbeat tone regarding its assessment of the economy. ECB President Mario Draghi stated that “risks surrounding the euro area growth outlook have moved to the downside” as weak economic data trickles in and the external environment remains challenging. Overall, the Bank will likely take a wait-and-see approach to see how external risks play out before unveiling any potential changes to guidance or monetary policy. That said, the weak economy has led many of our analysts to speculate that the refinancing rate may remain on hold all year.
Meanwhile, in February, Eurozone finance ministers endorsed Irishman Philip Lane to be the next chief economist of the ECB, when Belgian economist Peter Praet’s tenure ends in May. Lane, the governor of Ireland’s Central Bank, is considered to be a centrist-dove by market analysts, aligned with ECB President Mario Draghi. The chief economist is a crucial role in the ECB and has influence over the direction of monetary policy as the chief economist presents the economic rationale and analysis for decision making. Lane’s similar outlook to Draghi suggests no changes to the current status quo. Several other key positions including Draghi’s are set to change hands this year.
Inflation is seen remaining contained this year due to low energy-related price pressures and cooler growth. FocusEconomics panelists see harmonized inflation averaging 1.4% in 2019, which is down 0.1 percentage points from last month’s forecast. In 2020, inflation is seen inching up to 1.6%.
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Written by: Angela Bouzanis, Senior Economist