The early estimate of real GDP growth for the eurozone showed a significant slowdown for the first quarter of the year. Quarterly GDP growth fell from 0.7% to 0.4% - the slowest pace of quarterly growth for six quarters. The year-on-year measure fell to 2.5%, which by historical comparisons remains very strong.
It appears that adverse weather, dubbed the “Beast from the East”, probably caused output growth to slip as heavy snow disrupted travel, construction and some production.
It is worth mentioning that the latest figures matched consensus expectations, as the majority of economists correctly predicted the slowdown.
The big question now is whether the weather was the only cause of the slowdown, and therefore implying that the economy should rebound in the second quarter, or whether there is something more serious causing the slowdown. The rise in energy prices in recent months coupled with the stronger euro would have squeezed exporters.
Evidence so far has been inconclusive. For example, leading indicators such as the Markit purchasing managers’ surveys did not pick up in April after the slowdown in March. However, the Belgian National Bank survey did rebound strongly in April.
Moreover, early GDP releases from France, Spain and Italy showed that the Southern member states, which were not significantly impacted by the weather, did not experience a slowdown in GDP (0.7% and 0.3% respectively for Spain and Italy). France on the other hand saw growth slip from 0.7% to 0.3%.
Investors will probably remain nervous until there is a clearer signal of a pick-up in growth; however, we are confident that the economic slowdown recorded in the first quarter in the eurozone was largely a result of the adverse weather experienced in February and March. Economic growth should rebound significantly in the second quarter, making up for some, if not all of the lost momentum seen recently.
We therefore continue to expect the European Central Bank to tread the path towards ending quantitative easing in September, and raising interest rates in early 2019.
