17 May 2018
Eurozone: Mixed feelings

Eurozone growth has slowed since the beginning of the year, with inflation remaining unusually low. While both phenomena might be temporary, it looks as if a first rate hike is now not to be expected before the second half of 2019

After a robust 2017, growth has somewhat slowed since the beginning of the year. While the first quarter has been affected by a number of one-off effects and underlying fundamentals remain supportive, we still feel that peak growth is now behind us. At the same time, core inflation has unexpectedly fallen back to only 0.7%, which increases the probability that monetary policy will stay loose for longer.

First quarter GDP growth came in at 0.4% quarter-on-quarter, a clear deceleration from the 0.7% pace seen in the last quarter of 2017. There have certainly been one-off effects dragging down growth. An unusual cold spell in March might have negatively affected construction activity in the first quarter. At the same time, the European Centre for Disease Prevention and Control reported an unusual long influenza season this year, probably also hurting activity and consumption. Apart from that, strikes in Germany and the timing of the Easter holiday period, which was earlier than usual in several countries, had a dampening effect. The high oil price, which turned out to be more persistent than we anticipated, probably weighed on consumption. As 10% permanent moves in crude oil prices have close to a 0.2% effect on Eurozone consumption, the 15% higher crude price we had so far in the second quarter, is likely to shave off another 0.30% from household consumption this quarter. While we don’t think oil prices will remain as high as today in the rest of the year, one has to acknowledge that with the Iran nuclear deal now close to collapse, tensions on the oil market could linger a bit longer. This means that the negative impact on consumption is not likely to disappear in the near term.

In that regard, we don’t expect the second quarter to accelerate again towards the 0.7% growth pace we saw in the last quarter of 2017. Initial indicators for the second quarter hardly point to stronger growth momentum. Actually, some of the more forward-looking components of the confidence indicators like new orders, have softened, signalling that a somewhat slower cruising speed seems a more realistic assessment or that it could take a bit longer before a rebound emerges. A year-on-year growth of 2.8%, like we saw in the last quarter of 2017, looks difficult to emulate. That said, it would certainly be too soon to worry about a significant further weakening. Indeed, job growth remains satisfactory, boosting households’ income. While potential trade conflicts have become an important worry for European companies, business investment should continue to be supported by increasing supply constraints and accommodative financing conditions. According to the European Commission’s bi-annual investment survey carried out in March/April, real investment in the manufacturing industry is expected to increase by 7% this year, a significant upward revision from the 4% growth managers had expected in the previous survey of October/November 2017. Taking into account these elements and without any major upset, a quarterly growth rate hovering around 0.4% to 0.5% seems likely for the next six quarters. This amounts to 2.2% GDP growth this year and 1.8% in 2019.

France: Enjoying cyclical strength

President Emmanuel Macron is everywhere, controlling every national reform while remaining very active on the international scene, where he still lacks a major diplomatic victory. The French economy could help him out. Despite risks, we think growth remains very supportive of reforms

The first year of the Macron presidency is over. For him, this is not the time to analyse results but to persevere in producing them. It has been a busy year with several reforms, including initial labour and institutional reforms as well as the much-contested railway reform. Macron benefits from a 44% approval rating, which is higher than both Francois Hollande (25% after year one) or Nicolas Sarkozy (36%) and very close to Jacques Chirac. His popularity is highly concentrated in those who voted for him in the first round; he already lost some of the support he gained on the left in the second round. Despite being governed from the centre of the political spectrum, France is therefore as divided as last year, between those who call for reforms and others who prefer the status quo. Highly symbolic of this division is the dispute over railway reform (and subsequent strikes), which failed to gather enough street power to trigger any significant change (aimed at preparing the company for international competition and partly absorbing its debt of nearly 50 Bn€, roughly 2% of GDP).

Germany: The flip side of being the best

A weak start to the year does not make a fully-fledged downswing. However, boosting investments will be key to solving the current supply-side constraints

The German economy had an unexpectedly weak start to the new year. After a long period of superlatives and strong quarterly growth, a series of one-off factors like the winter weather, the timing of vacation, a flu epidemic and strikes in industry led to speculation about a possible cyclical downswing. In our view, this concern is premature. Sound fundamentals bode well for a rebound in the economy over the summer months. However, the German economy is increasingly suffering from the flip side of being the best: supply-side constraints, hampering future growth.

Italy: The impact of a possible 5SM-League deal

Italy's anti-establishment Five Star Movement and the far-right League are close to a deal but they have yet to agree on a shared programme and a suitable prime minister. Should the talks break down, a temporary neutral government would likely be established with fresh elections held in the autumn

A possible 5SM-League tie-up

The 4 March elections resulted in a hung parliament, and the two-month long history of this new legislature has been marked by repeated unsuccessful attempts to break the political gridlock. Two rounds of consultations and two explorative mandates simply confirmed the staunch cross-vetoes which have prevented the formation of viable political alliances. The persistent gridlock persuaded President Sergio Mattarella to speed things up, putting political actors with their back to the wall. To this aim, he called a final one-day wrap-up consultation day, after which he would take the initiative. As no new unexplored solution emerged at the end of that day, Mattarella announced that he would soon launch a “neutral” government with a time-limit attached, bringing Italians back to the polls in early 2019 at the latest. Against this backdrop, Luigi Di Maio, the leader of the 5SM, and Matteo Salvini, the leader of the League, came up with a surprising last-minute attempt to strike a deal and form a government together. All this was made possible by the decision of Silvio Berlusconi, the leader of Forza Italia, to step aside and allow the League, its main coalition partner, to start coalition talks. The two parties together could count on a solid majority at the Chamber of Deputies (349 MPs with a majority threshold of 316) and a thinner one at the Senate (169 MPs against a threshold of 158).

Netherlands: Still in sixth gear

The Dutch economy continues to grow above potential and the Eurozone average, but we think there is still ample room for more. Despite marginal wage rates finally accelerating, inflation remains moderate in 2018, before making a tax-induced jump in 2019

Despite the fact that some survey indicators have softened in recent months and a somewhat disappointing first-quarter GDP figure (0,5% quarter on quarter), possibly as the result of geopolitical tensions, the outlook for the Dutch economy for 2018 is still bright. 

We forecast GDP growth of 2.8%, which means this will be the fifth year of growth above the Eurozone average and the fourth above the estimated potential rate. The drop in sentiment was seen especially in industry and retail in recent months, while confidence of consumers and commercial services hardly changed. While current production held up quite well, purchasing managers indices indicated that industry primarily turned less optimistic about export orders, pointing at downward risks for foreign demand.

Spain: Has growth peaked?

The Spanish economy has continued its strong growth in 2018 but a slowdown could well be on the horizon. Meanwhile, there are optimistic tunes around the budget but no symphony just yet 

Current activity is strong

The Spanish economy continued its strong performance at the beginning of the year recording 0.7% quarter-on-quarter growth identical to third and fourth quarter growth in 2017. This figure was expected as the high-frequency data for the first quarter was overall optimistic. The average PMI for 1Q18 was higher than 4Q17's, the unemployment rate continued to decline and consumer confidence still remains at a considerably high level despite having dipped slightly. 

Belgium: Just not fast enough

For Belgium, 2017 was another recovery year which is definitively satisfactory but things could be much better. Yet, we don't see any signs of strong acceleration in the near future

It could be better

The Belgian economy is sound, with positive growth in all sectors including solid job creation, growing household disposable income and company profit margins with high confidence levels. But despite all these positive elements, some disappointment remains.

The current growth level stands clearly below its long-term average, while activity used to grow fast in a recovery period. Moreover, GDP grew by 3.2% in The Netherlands, 2.2% in Germany and even 1.8% in France over the same period, which means the Belgian economy performed worse than its neighbours and that is quite unusual. Finally, the GDP evolution was not in line with the (most better) evolution of soft data.

In the first quarter of this year, nothing seems to have changed: Belgian economic activity grew by 0.4% compared to the previous quarter and 1.6% year-on-year. Without any detail of the GDP components, it's difficult to explain why growth was, once again, so moderate. That said, with other Eurozone countries feeling some slowdown since the beginning of 2018, activity in the Belgian export sector could have been hit.

The Belgian economy performed worse than Netherlands, Germany and even France and that is quite unusual

More importantly, while Belgium has always been considered as a country of savers, the positive growth of private consumption has been supported between 2010 and 2016 by a decrease of the saving ratio (from 14.9% in 2010 to 11.3% last year), falling below the Eurozone average. As job creation has boosted disposable income since 2017, it seems that households preferred to keep their consumption moderate to save more. That’s probably quite sound from a financial stability point of view, but the price to pay is softer domestic demand. Indeed, private consumption has, in 2017, shown some signs of weakness. The Q1 GDP number maybe reflects some further weakness from that side of the economy.

Portugal: Some weakening after a strong cyclical push

Most indicators are moving in the right direction but burdens of the past are still a drag. We expect the Portuguese economy to slow down towards the end of the year and forecast an annual growth rate of 2.1% in 2018

Strong labour market

The strength of the Portuguese labour market in 2017 surprised us. 

The unemployment rate fell below the Eurozone's and employment grew at a record rate of 3.3%. This strength continued in the first quarter of 2018 as the unemployment rate declined further and employment growth continued to be above the 3%-level. It's, therefore, no surprise there are now more optimistic consumers than pessimistic ones, and so private consumption remains a strong growth contributor.

Greece: Looking through the end of the third programme

Greece is rushing to complete prior actions to close the ESM programme. Some extra debt relief should be conceded at the end of it, but life after it will continue under strict surveillance, however “clean” the exit is

Economic recovery driven by investment

The Greek economic recovery continues at a moderate pace, with a domestic demand drive. 

Interestingly, as confirmed by 4Q17 data, investment has become by and large the main engine of Greek economic growth. On the flipside, the high import content of investments has compressed net exports. Despite an improving confidence backdrop and a solid 2.5% year on year expansion of employment, private consumption came in on the soft side. To be sure, ten years after the outburst of the global financial crisis, total employment is still 20% below pre-crisis highs, and the unemployment rate hovers around 20.8%.

Austria: Still on track

With the economy carrying most of last year’s momentum into 2018,  the main focus after the summer will be Austria’s EU presidency

With first-quarter GDP growth coming in at a robust 0.8% quarter on quarter, it’s still all systems go in Austria driven mainly by domestic demand but also foreign impulses. While we expect the current strong momentum to slow down this year, it will simply be a levelling off from recent highs rather than a significant downswing.

Eurozone: Low interest rates continue to support real estate

Recovery of housing markets in the Eurozone continues and remains supported by low-interest rates. But we suspect 2018 will be another year of high house price growth


2017 was an excellent year for the Eurozone economy, and so it isn't surprising that house prices grew at the rapid pace of 3.5%. The strong economy lead to higher disposable incomes pushing prices upwards. The low-interest rate environment also maintained the purchasing power of consumers to buy houses.

Even though we think the Eurozone economy will cool down towards the end of the year, we suspect 2018 will be another year of high house price growth. Compared to January, our forecast remains constant at 3.3%. But it's worth remembering; the 3.3% expected growth figure is a weighted average of all the constituent countries of the Eurozone that can have very different individual situations.

Ireland: Celtic tiger continues to roar

Ireland's economy expanded 7.8% in 2017, making it one of the fastest growing in the world. Much of this figure continues to be dominated by the volatility caused by multinational firms in Ireland, but the economy also performs very well with those effects stripped out

Rapid growth

Ireland continues to show growth rates otherwise only seen in Africa and Asia. In fact, 2017 marks the third year out of four in which Ireland has grown faster than China. The impact of multinationals remains large and clouds the assessment of economic activity. Investment dropped by more than 20% in 2017, caused mainly by a swing in intellectual property investment which is dominated by multinational activity. Related to this, imports were also down, which had a large positive effect on net exports. The strong growth figures were therefore mainly attributable to net exports while consumption also had a healthy impact on growth.

The Irish Central Statistics Office “modified domestic demand” aims to provide a fairer view on domestic demand conditions. It strips out trade in aircraft by leasing companies and investment in intellectual property. While the official domestic demand data showed a decline of 9% in 2017, the modified numbers showed an increase of 3.9% over the year, which is a good indicator of the strength of the Irish economy. Unemployment fell to 5.9% in April- approaching its lows of the mid-2000s which were around 5%. This is far below the natural rate of unemployment, which is estimated by the OECD to be 8.5% this year, and as a result, wage pressures are increasing. Average hourly earnings grew by 2.1% in 2017, stronger than in any of the post-2008 years. 2018 will be a year of moderation, but growth is still likely to be well above 6% thanks to a massive carryover effect.

Signs of overheating?

While GDP growth may overstate the strength of the Irish economy, the Celtic tiger does not just exist on paper. The Irish economy is indeed growing at a very rapid pace. This brings back the concerns of a boom-bust cycle still fresh in our memory. House prices continue to grow north of 10%, indicating a significant overheating of the market. Mortgage approvals have been slowing but total transactions remain strong. This could indicate that more cash transactions are happening. As supply remains a large constraint on the market and residential construction activity remains slower than demand growth, tightness in the market continues to build.

Risks ahead

The external environment provides the largest uncertainty to the outlook. With the US tax deal in place, movements of assets away from Ireland are to be expected. Lower Irish holdings of US treasuries are a sign that the US tax changes are having an impact. At the same time, the European Commission ruling that Ireland had given Apple unfair tax incentives has had an impact on its attractiveness as well. Even bigger uncertainty comes from Brexit, as it is still very much uncertain how the Irish border issue will be resolved. The current agreement, which guarantees economic and regulatory alignment between Ireland and Northern Ireland, is facing scrutiny as the UK wants to be able to make independent regulatory changes, while it also does not want any differences in regulation between Northern Ireland and the rest of the UK. This uncertainty means that the outlook for exports remains subdued. The harder the Brexit, the more burdensome it will be on Ireland.

Reading time around 15 minutes

ING’s Eurozone Quarterly: A slower cruising speed

Economic growth in the Eurozone has slowed since the start of the year and inflation remains unusually low. This might be temporary but there are risks ahead- and the political landscape isn't helping. In our latest Eurozone Quarterly Update, we look at where the economy is heading now and what it could mean for monetary policy  

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