2019: Winners: France & Spain. Losers: Germany & Italy

We said:

This week’s preliminary Q4 GDP data for the euro area (EA) don’t set the seal on 2018. The sharp slowdown is bound to continue at least for H12019.

We don’t expect any of the major EA economies to enter a prolonged recession this year, but we can distinguish between winners and losers. Its reliance on Chinese and EM demand makes Germany structurally a loser until proper stimulus kicks in (either China’s or Germany’s own). The ongoing build-up in inventories will continue to hobble industrial production and capex. The only bright spot in Germany for now seems to be the construction sector.

Italy also counts as a loser. On the export front, the similarity of China’s export basket and the RMB’s decline have undercut Italy’s competitiveness further. At home, higher sovereign spreads are affecting the real economy through increasingly stringent credit standards (right-hand chart above). Foreign demand and credit contraction paint a negative picture for firms’ investment in coming quarters. For now, it’s hard to see Italy grow more than 0.4-0.5% this year.

Spain and France: relative winners. Robust domestic demand led by private consumption and government spending in Q12019 will take over as the primary driver of growth in both countries. In France, milder weather compared to Q12018, limited disruption from “yellow vest” protests, and the effect of President Macron’s income-support measures will boost household purchasing power and consumption. A rebound in consumer confidence in January reinforces this hypothesis. In Spain, the 22% increase in the minimum wage that became effective last month will also contribute significantly to consumption growth.

 

Outcome:

GDP growth diverged within the euro area. Germany slowed fastest posting -0.1% in Q2. Italian growth in Q2 was 0.2%. France grew by 0.2% and Spain by 0.5%. 
From date of writing to 21 August 2019. French equities have outperformed. 

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