Eurozone Economic Watch · Eurozone | Growth gained momentum in 1Q19, but trending to more moderate...

BBVA Research – Eurozone Economic Watch | May 2019 / 1

Eurozone

Economic Watch

May 2019


Eurozone | Growth gained momentum in 1Q19, but trending to

more moderate pace amid increasing downward risks

Growth in the Eurozone surprised on the upside during 1Q19, especially in Italy and Germany, likely

related to fading negative one-off effects in previous quarters and the positive effect on mild winter.

Beyond volatility, there are signs of a more protracted weakness in the industrial sector linked to

structural factors (automobiles) and slowing global demand.

Hard data up to March point to domestic demand as the main driver of growth, while the support of net

exports should be small with differences across countries. Retail sales grew at steady robust rate,

supported by the resilience of consumers’ mood and improving labour market. The better performance of

exports to other EU countries offset the decline of those to Asia, raising doubts about foreign support

and the sustainability of the improvement in the industrial sector.

Soft data up to May show some stabilization but at lower levels than in 1Q19 and indicate that growth

could lose some steam in 2Q19. Higher uncertainty is taking its toll also on services sentiment.

Our MICA-BBVA model now projects Eurozone GDP to slow slightly to around 0.3% QoQ in 2Q19. This

combined with positive surprise in 1Q19 could lead to a slight upward bias to our forecast of growth at

1% in 2019, but we remain cautious due to gloomier leading indicators and trade threats.

Core inflation increased in April due to the effect of Easter on service prices, but it is likely to remain very

subdued. In addition, inflation expectations continue to slip, so the ECB will remain very cautious and

debating further measures if necessary.

Risks are tilted to the downside, mostly related to political events. The risk of a no-deal Brexit is

increasing while US trade disputes are heightening, not only with China but also with the EU.


GDP growth surprised on the upside in 1Q19, gaining momentum across the

Eurozone…

Source: Eurostat and BBVA Research

GDP and expenditure contribution by country(%QoQ, pp)

The stronger growth was underpinned by domestic demand, both private consumption and investment, while

net exports weighed on activity except in Germany

-0.2

-0.1

0.0

0.1

0.2

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

1Q

18

2Q

18

3Q

18

4Q

18

1Q

19

1Q

18

2Q

18

3Q

18

4Q

18

1Q

19

1Q

18

2Q

18

3Q

18

4Q

18

1Q

19

1Q

18

2Q

18

3Q

18

4Q

18

1Q

19

Ge

rma

ny

Fra

nce

Italy

Sp

ain

Germany France Italy Spain Diff. GDP relative to2008

Final Consumption GFCF Inventories Net Exports

Diff. GDP level relative to 2008 GDP q/q % change Euro GDP QoQ


… but economic momentum seems to trend to a more moderate pace

GDP and MICA forecasts(%, QoQ)


GDP, contribution by components(%, QoQ)

Our MICA-BBVA model now projects GDP to slow slightly to around 0.3% QoQ in 2Q19. Better-than-expected

performance in 1H19 would put a slight upward bias to our growth forecast at 1% in 2019, but we remain

cautious due to gloomier leading indicators and increasing uncertainty over the trade outlook

-1.5

-0.5

0.5

1.5

2.5

2Q

15

3Q

15

4Q

15

1Q

16

2Q

16

3Q

16

4Q

16

1Q

17

2Q

17

3Q

17

4Q

17

1Q

18

2Q

18

3Q

18

4Q

18

1Q

19

2Q

19

Private consumption Public consumption

GFCF Inventories

Net Exports Real GDP

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

Jun-1

5

Dec-1

5

Jun-1

6

Dec-1

6

Jun-1

7

Dec-1

7

Jun-1

8

Dec-1

8

Jun-1

9

CI 20% CI 40% CI 60% Observed


Robust growth of retail sales in 1Q19 and the resilience of consumer

confidence suggest private consumption will remain the main driver of growth

Retail sales and total wage bill(%YoY; pp)


Retail sales and consumer confidence(%QoQ, level)

Retail sales grew steadily at 0.7% QoQ over last year, supported by the improvement in the labour market

and low inflation. But despite the resilience of consumer mood, it is unlikely that private consumption gain

further momentum ahead

0.9

0.5

-0.2

0.7

0.0

0.7

1.0

0.4

0.8

0.5

0.3

0.1

0.9

-0.1

0.80.7

-12.0

-10.0

-8.0

-6.0

-4.0

-2.0

0.0

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

1.2

Ma

y-15

Aug

-15

Nov-1

5

Fe

b-1

6

Ma

y-16

Aug

-16

Nov-1

6

Fe

b-1

7

Ma

y-17

Aug

-17

Nov-1

7

Fe

b-1

8

Ma

y-18

Aug

-18

Nov-1

8

Fe

b-1

9

Ma

y-19

Retail sales (QoQ) Consumer confidence

Retail Sales (% QoQ)

ConsumerConfidence -3

-2

-1

0

1

2

3

4

1Q

13

2Q

13

3Q

13

4Q

13

1Q

14

2Q

14

3Q

14

4Q

14

1Q

15

2Q

15

3Q

15

4Q

15

1Q

16

2Q

16

3Q

16

4Q

16

1Q

17

2Q

17

3Q

17

4Q

17

1Q

18

2Q

18

3Q

18

4Q

18

1Q

19

Real compensation Employees

Total wage bill Retail sales


Despite activity slowdown, the steady growth in employment resulted in a

declining unemployment rate to 7.7% in March

Annual unemployment change by gender and age(Million)


Unemployment rate by country(%)

Unemployment in the Eurozone drops by 0.1pp, mainly due to better perfromance in Italy and (to a lesser)

extent in Spain

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

Mar-18 Feb-19 Mar-19

Eurozone Germany France Italy Spain

-1.8

-1.6

-1.4

-1.2

-1.0

-0.8

-0.6

-0.4

-0.2

0.0

Ma

r-1

6

Jun-1

6

Sep

-16

Dec-1

6

Ma

r-1

7

Jun-1

7

Sep

-17

Dec-1

7

Ma

r-1

8

Jun-1

8

Sep

-18

Dec-1

8

Ma

r-1

9

Women 25-74Y Men 25-74Y Men < 25Y

Women < 25Y Total


Exports grew again in March and have maintained a stable pace since mid-

2018

Exports by destination(%YoY; pp)


Trade balance(€bn; %GDP)

Exports to other EU countries offset the moderation of those to China and the fall of sales to other Asian

countries. There are increasing concerns on the trade war and thus on demand from Asia

-6

-4

-2

0

2

4

6

1T

15

2T

15

3T

15

4T

15

1T

16

2T

16

3T

16

4T

16

1T

17

2T

17

3T

17

4T

17

1T

18

2T

18

3T

18

4T

18

1T

19

Intra UE EE.UU.China Asia Ex. ChinaLatAm Resto del MundoExportaciones totales

0.8

0.7

0.9 0.9 0.9 0.9 0.9

0.8 0.8

1.00.9

0.8

0.6

0.5

0.60.7

0.0

0.2

0.4

0.6

0.8

1.0

1.2

140

150

160

170

180

190

200

Ma

r-15

Ju

n-1

5

Se

p-1

5

Dec-1

5

Ma

r-16

Ju

n-1

6

Se

p-1

6

Dec-1

6

Ma

r-17

Ju

n-1

7

Se

p-1

7

Dec-1

7

Ma

r-18

Ju

n-1

8

Se

p-1

8

Dec-1

8

Ma

r-19

Exports Imports Trade Balance (% GDP)

Exports, imports

Trade Balance (%GDP)


The downward trend in industrial production seems to have halted…

IP capital equipment, investment in M&E and

capacity utilization(%QoQ; %)


Industrial production(Level, % QoQ)

Beyond volatility, industrial production increased in 1Q19 after falling in 2H18, driven by the rebound in

capital and durable goods. This suggests that investment could increase further in coming quarters.

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

96

98

100

102

104

106

108

110

Ma

r-1

5

Jun-1

5

Sep

-15

Dec-1

5

Ma

r-1

6

Jun-1

6

Sep

-16

Dec-1

6

Ma

r-1

7

Jun-1

7

Sep

-17

Dec-1

7

Ma

r-1

8

Jun-1

8

Sep

-18

Dec-1

8

Ma

r-1

9

IP (2015=100)

IP (level)

IP (% QoQ)

80

80

81

81

82

82

83

83

84

84

85

-5

-4

-3

-2

-1

0

1

2

3

4

5

6

Apr-

15

Jul-1

5

Oct-

15

Jan-1

6

Apr-

16

Jul-1

6

Oct-

16

Jan-1

7

Apr-

17

Jul-1

7

Oct-

17

Jan-1

8

Apr-

18

Jul-1

8

Oct-

18

Jan-1

9

Apr-

19

GFCF: M&E (%QoQ) IP Capital (%QoQ)

Capacity Utilisation (%)

Capacity utilization (%)

Inv. M&E; IP


… but manufacturing confidence suggests that the weakness on the sector

will persist, possibly spreading onto services

EC confidence survey(level)


PMI and GDP (level, %QoQ)

The EC and PMI surveys suggest that the decline in manufacturing confidence could have reached bottom,

while higher uncertainty is taking its toll also on expectations on the service sector

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

47

49

51

53

55

57

59

61

63

ma

y.-1

7

ag

o.-

17

no

v.-1

7

feb

.-18

ma

y.-1

8

ag

o.-

18

no

v.-1

8

feb

.-19

ma

y.-1

9

Real GDP (%QoQ) PMI

Services PMI Manufacturing PMI

PMIs llevel GDP (%QoQ)

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

80

85

90

95

100

105

110

115

120

Apr-

13

Oct-

13

Apr-

14

Oct-

14

Apr-

15

Oct-

15

Apr-

16

Oct-

16

Apr-

17

Oct-

17

Apr-

18

Oct-

18

Apr-

19

ESI (eje izq) Industrial (eje der.)Consumidor (eje der.) Servicios (eje der.)


Core inflation increased in April driven by the Easter effect on service prices,

but it will remain at low levels

Inflation swaps 5y5y (%YoY)

Source: Eurostat, Bloomberg and BBVA Research

Inflation contribution of components(%YoY, pp)

Beyond volatility, core inflation is likely to remain at very low levels, while headline inflation will be shaped by

energy prices. In addition, inflation expectations continue to slip despite higher oil prices

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

Ap

r-1

7

Ju

n-1

7

Aug-1

7

Oct-

17

De

c-1

7

Fe

b-1

8

Ap

r-1

8

Ju

n-1

8

Au

g-1

8

Oct-

18

De

c-1

8

Fe

b-1

9

Ap

r-1

9

Services Non-energy industrial goods

Processed food Energy

Unprocessed food HICP (% YoY)

1.2

1.4

1.6

1.8

2.0

2.2

2.4

2.6

2.8

31

-Ma

y-10

30

-Nov-1

0

31

-Ma

y-11

30

-Nov-1

1

31

-Ma

y-12

30

-Nov-1

2

31

-Ma

y-13

30

-Nov-1

3

31

-Ma

y-14

30

-Nov-1

4

31

-Ma

y-15

30

-Nov-1

5

31

-Ma

y-16

30

-Nov-1

6

31

-Ma

y-17

30

-Nov-1

7

31

-Ma

y-18

30

-Nov-1

8

31

-Ma

y-19


Eurozone

Economic Watch

May 2019


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prepared by BBVA or obtained from or based on sources we consider to be reliable, but not independently verified by BBVA. Therefore, BBVA offers no warranty, either express or implicit,

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