Euro area economy grows weaker than expectations in Q4 2019, likely to rebound very gradually in 2020

The euro area’s fourth quarter GDP came in soft today, as two of the euro area’s three biggest economies shrank. Inflation picked up on the surface, but core eased. The advance GDP data released today indicated that the euro area economy grew slower than anticipated in the fourth quarter. Growth was reported at 0.1 percent quarter-on-quarter and 1 percent year-on-year. However, French and Italian economies shrank in the fourth quarter.

The French economy shrank unexpectedly in the fourth quarter, with the growth contracting 0.1 percent quarter-on-quarter, well below expectations. This brings French growth over 2019 to 1.2 percent, easing from 1.7 percent in 2018. France has been the engine of euro area growth in the prior quarters, but has now been impacted by the slowdown in the global economy and the pension reform strikes.

The strikes have mainly impacted manufacturing and transport sectors. As the protests continued in January, this weakness is expected to continue in the current quarter, but fade beyond, said Nordea Bank in a research report. Macron will now cast his hope on resilience in consumer spending and business investment. However, the investments are under pressure of the threat of extra tariffs on French luxury products from the U.S., which has so far been averted.

The Italian economy also shrank in the fourth quarter. The growth contracted 0.3 percent quarter-on-quarter, leaving GDP in the fourth quarter unchanged compared to last year. The economy expanded by a mere 0.2 percent in 2019. Italian outlook is quite uncertain, even though the risk of a government crisis has ebbed slightly.

Spanish economy grew 0.5 percent, coming slightly above expectations. German quarterly growth figures have not been released yet, but annual growth for the whole of 2019 has already been reported at 0.6 percent.

The ECB’s tone was more optimistic last week, saying that the risks to the outlook for the euro area had become moderately less pronounced. Looking at survey indicators, it appears like recession risks are waning and the outlook is stabilizing, although at soft levels.

“We expect a very gradual recovery during 2020, with annual growth rates bottoming out in Q2 2020. Today’s GDP number puts some pressure on the ECB, but as they are backward looking, it will likely not change their view of the outlook and the current stance. We expect no policy changes from the ECB this year. National governments however can be pressured to provide more fiscal stimulus based on these growth numbers”, stated Nordea Bank.

Meanwhile, euro area’s headline inflation accelerated to 1.4 percent year-on-year in January, showed the flash estimate. Energy prices mainly drove the headline rate, positively contributing 0.3 percentage points. Food prices contributed positively as well. Core inflation eased to 1.1 percent year-on-year from 1.3 percent in December.

“Looking ahead, we expect headline inflation to stay at around the current level this quarter. Thereafter, it will dip lower for the rest of the year”, added Nordea Bank.