Real GDP in the Eurozone grew 2.5 percent in 2017, the strongest annual growth rate since 2007. There are some signs that the economic activity in the euro area has decelerated a bit thus far in 2018, but we look for the expansion to generally remain intact. The ECB also apparently has confidence in the economic outlook. At its policy meeting this week the Governing Council dropped a reference to expand its QE program again, if necessary. Although we look the Council to “taper” its QE program further later this year, benign inflation means that the ECB is probably in no hurry to actually tighten policy.
Data released this week confirmed that real GDP in the Eurozone grew at an annualized rate of 2.4 percent on a sequential basis in Q4-2017 (Figure 1). The new information in the data release – preliminary data printed at the end of January – was the breakdown of the GDP data into its underlying demand components.
The good news is that all domestic spending components (i.e., consumer spending, investment spending and government spending) continued to expand in Q4. The bad news is that sequential growth in domestic demand was sluggish, rising only 1.5 percent on an annualized basis. Strength in exports relative to imports – the former rose nearly 8 percent while the latter grew only 4.4 percent – boosted the overall rate of real GDP growth in the fourth quarter.
The data from January that are now starting to trickle in suggest that economic activity may be decelerating a bit in early 2018. For example, retail sales in the overall euro area edged down 0.1 percent in January, which follows the 1.0 percent decline that was registered in December. Factory orders in Germany tumbled 3.9 percent in January, completely reversing December’s 3.0 percent gain. Industrial production (IP) in Germany declined 0.1 percent in January, while IP in France fell 2.0 percent. That said, the year-over-year growth rates in factory orders and IP in Germany remained robust in January (Figure 2).
Does this mean that the expansion in the euro area is stalling? Probably not. For starters, sequential growth rates can be volatile. As the year-over-year strength in German factory orders and IP show, underlying growth momentum appears to be solid at present. In addition, the manufacturing and service sector PMIs remained at high levels through February, although both indices have edged a bit lower in recent months (Figure 3). Moreover, macroeconomic policy in the Eurozone is still accommodative at least for now, and bank credit is accelerating. We look for some deceleration in Eurozone real GDP this year, but we expect that the expansion will generally remain intact.
The European Central Bank (ECB) is showing increased confidence in the economic outlook. Until this week, the Governing Council had been saying that it could increase the size or duration of its quantitative easing (QE) program, if necessary. At its policy meeting on March 8 the Council dropped this reference to increasing its QE program. In our view, the ECB is signaling that it intends to “taper” its QE program further later this year.
That said, the Governing Council appears to be in no hurry to tighten policy. (“Tapering” just dials back further accommodation.) The policy statement this week noted that “measures of underlying inflation remain subdued and have yet to show convincing signs of a sustained upward trend” (Figure 4). Indeed, we continue to believe that the Council will refrain from hiking rates until well into 2019.
