Eurozone: Anxiety undermines momentum - ANZ

For Eurozone, owing to the severity of the double dip recession between Q1 2008 and Q1 2013 (GFC, sovereign debt crisis), the current business cycle has been modest in comparison with previous expansions, according to analysts at ANZ.

Key Quotes

“Associated deflation risks prompted the ECB to implement extraordinary monetary measures (negative rates, quantitative easing). Between Q4 2016 and Q4 2017, EA growth lifted at an average pace of 0.7% q/q. That was the strongest period of growth since 2006.”

“It appeared that the EA was finally reaching a period of escape velocity, which we define as sustained above-trend growth consistent with a normalisation in inflation toward the ECB’s target.”

“In H1 2018, GDP growth averaged 0.35% q/q, half the pace of the previous five quarters. That has raised doubts about what may be the dynamic, sustainable pace of the upswing.”

“Intensified trade friction and the coincident slump in investor activity raised growth uncertainty during Q2, whilst confirmation of the populist administration in Italy and its antiausterity spending plans added to the unsettled climate.”

“To a large extent, activity indicators have justified this pessimism. Exports, a barometer of economic health, fell 0.9% q/q in Q1 following an outsized 2.4% q/q rise in Q4.”

“It is clear that heightened trade tensions along with the recent weakness in output and order books have weighed on GDP and investor sentiment. In that regard, the late July agreement between Washington and Brussels to enter into trade talks and suspend the implementation of further tariffs is welcome as it provides greater certainty, even though it could be just short term.”

“The early evidence is that investor confidence has stabilised, but it will be imperative in assessing the future growth path that the hard data for Q3 begins to settle.”