Eurozone Q1 GDP expanded 0.5 percent in Q1 (not annualized), matching the consensus forecast. While the Eurozone appears to be on solid footing, economic growth is not likely to break out any time soon.
Steady as She Goes
Data released this morning revealed that GDP in the Eurozone expanded 0.5 percent in Q1 (2.0 percent annualized) and is up 1.7 percent from a year ago (top chart). This now marks the ninth consecutive quarter in which the year-over-year growth rate has fallen in the range of 1.5 percent to 2.0 percent. Although a breakdown of GDP into its demand components is not yet available, inferences can be made from the monthly data.
Looking at spending patterns, it is likely that growth in personal consumption contributed positively to the headline figure. Retail sales, by volume, were up 0.2 percent in the first two months of 2017 compared to the Q4 average. Likewise, car registrations have trended higher recently and have eclipsed the 900K mark per month for the first time since January 2010 (middle chart). Export volumes are also starting to trend higher, reaching 3.0 percent growth in January, on a year-over-year basis, for the first time since May 2015. The monthly data, although not jawdropping, is consistent with a gradual expansion that is becoming increasingly self-sustaining.
Perhaps the greatest threat to continued economic improvement in the Eurozone is the French Presidential election on May 7. However, if Emmanuel Macron, the candidate of the centrist En Marche! party is elected president, as is widely expected, then a downside risk to the French economy, and the Eurozone will have faded.
With GDP growth in the Eurozone relatively tame, it is no surprise that CPI inflation has been somewhat subdued (bottom chart). The overall rate of inflation currently stands just below 2 percent. Although the core rate of inflation is lower, it did jump to 1.2 percent in April from 0.7 percent in March. On Thursday of last week, the European Central Bank (ECB) held a regularly scheduled policy meeting in which the Governing Council kept its main policy rates unchanged, which was universally expected. In the subsequent press conference, ECB President Draghi stated that risks to the Eurozone outlook "are still tilted to the downside." The Governing Council did, however, acknowledge that risks were "moving toward a more balanced configuration."
In our view, the ECB will continue to buy €60 billion worth of bonds each month for the next few months. However, our expectation is that at some point this summer, the Governing Council could announce plans to "taper" its bond purchases further if the economic outlooks remains upbeat and/or inflation continues to trend higher. Against the backdrop of the Federal Reserve, which is expected to hike rates two more times this year, and the ECB, which is likely to remain on hold, our currency strategy team looks for the euro to depreciate modestly against the dollar in coming months.