Eurozone: Broad-based growth in Q4 shows economic strength ahead of elections - ING

Bert Colijn, Senior Economist at ING, notes that the Eurozone Q4 GDP growth has been confirmed at a robust 0.4% QoQ and the breakdown by expenditure components showed an uptick in all components, indicating that the strength of the Eurozone economy is currently broad-based, despite looming political risk but still, this won’t be a late game changer for the ECB’s Thursday board meeting.

Key Quotes

“A recovery in investment in the fourth quarter stood out as the most important improvement. Q3 had seen a decline of -0.7%, followed by a 0.6% increase in Q4. Part of that can be attributed to the Brexit referendum as uncertainty after the vote has likely caused delayed investment decisions in the Eurozone. Improved lending growth also underpins the investment recovery, which the ECB considers to be in large part thanks to its monetary policy.”

“Household consumption growth accelerated from 0.3% QoQ to 0.4% QoQ in Q4, boosted by a strengthening labour market and optimism among consumers. People returning to jobs and a well performing stock market have trumped any political risks in terms of consumer sentiment in Q4. Recent retail sales figures did reveal a weakening in consumption, which could be because of the temporarily increased inflation rate, or the slowdown in unemployment declines over recent months.”

“Exports improved markedly as well in Q4. The global economic environment is strong at the moment and the Eurozone is profiting from this. New orders from outside the Eurozone have grown significantly and have caused overall new orders to be at their highest point since early 2008. The weakened euro has been of importance here, but the surprisingly strong global growth environment is an important contributor as well. This has boosted export growth from 0.3% QoQ to 1.7% QoQ. Imports grew quicker though, as domestic demand improved in Q4, causing a negative contribution from net exports. Still, the exports environment remains quite favorable early in 2017.”

“This basket of positive numbers about the Eurozone won’t be a late game changer for the ECB board meeting on Thursday though. The recent surge in headline inflation is temporary and core inflation remains stuck at 0.9% for the moment. The ECB has also mentioned that its monetary policy has been an important factor in the current growth environment, with Peter Praet even calling the ECB “the only game in town” recently. Growth indeed remains susceptible to the Eurozone’s packed political agenda in the months ahead. Therefore, we’ll likely have to look for ECB clues about the end of QE later in the year.”