Eurozone Q2 GDP To Surprise Upward But Challenges Persist

On Monday at 10.00 UK Time, the European statistics office (Eurostat) will release the first estimate of Eurozone Q2 GDP. Bloomberg consensus expects a rise of 0.2% QoQ (v unchanged prior) but regional surveys suggest an upward surprise is likely.

Regional Surveys Suggest Eurozone Q2 GDP Could Grow By More Than 0.2%

On Friday, several countries in the Eurozone already revealed their estimates for Q2 GDP. Germany, Austria and Latvia showed disappointing results but it was more than compensated by data from France, Spain and especially Ireland.

According to Destatis, German GDP?was unchanged in Q2, falling short of the 0.1% growth estimated by economists (v -0.1% prior). Private consumption helped to stabilize the economy, the statistics office said. It came as the Bundesbank made cautious comments two weeks ago, but expected a positive print.

In the meantime, according to the latest WIFO Flash Estimate, Austrian GDP decreased by 0.4% in Q2 (v +0.1% prior). The recession in industry and losses in the construction industry in particular weighed on the current overall economic development.

Elsewhere, GDP contracted even more in Latvia. Flash estimate of the Central Statistical Bureau shows that, in Q2, GDP decreased by 0.6% (v +0.5% prior).

Over the same period, French GDP advanced more than expected, rising by 0.5% (v +0.1% prior and +0.1%e). According to Insee data, the positive surprise was mainly supported by a 2.6% jump in exports. This can be explained by a 11.2% increase in exports of transport equipment – including in particular the delivery of a cruise ship.

Spain’s economy, too, showed?signs of resilience?with growth of 0.4% QoQ (v +0.5% prior and 0.4%e), supported by rising household demand.

Meanwhile, the biggest QoQ increase came from Ireland. According to the?Central Statistics Office, Irish GDP grew by 3.3% in Q2 2023 (v -2.8% prior). Given that Ireland weight in Eurozone GDP is ~3.5%, the country will add a bit more than 0.1% to the headline figure.

Risks Remain for H2 2023

I wouldn't be surprised to see some optimism after the release of Q2 GDP first estimate. It will come after Q1 figures were revised upward from -0.1% to 0.0%, confirming Eurozone avoided a technical recession this winter. However, several indicators suggest the outlook could deteriorate in the second part of the year and one-off positive factors could reverse.

First of all, latest monetary developments in the Eurozone point a gloomy outlook for the coming months. It came as Eurozone demand for loans among firms has plummeted to an unprecedented low. According to a recent?survey?by the European Central Bank (ECB), big banks reported a substantial drop in net demand for loans during the second quarter of 2023,?marking the lowest level since the survey’s inception in 2003.?In this context, Christine Lagarde recently made cautious comments about the short-term economic outlook.?

These fears were raised a few days earlier with the release of composite PMI which contracted for the second straight month in July. Meanwhile, one-off positive factor in France (delivery of the cruise ship) will reverse while downward pressures in Germany could intensify amid a global slowdown and persistent weakness in China. Lastly, Eurozone economy remains vulnerable to social, political and geopolitical tensions.

Therefore, I think that challenges for Eurozone economy remain ahead particularly in a context where monetary policy is expected to remain restrictive and the full effects of previous moves are yet to be realized in the broader economy. In addition, fiscal policy will be less supportive in 2024, raising probability of a downward surprise for 2024 GDP (+1.0%e expected by the Bloomberg consensus).