ab15 January 2024Global Research and Evidence LabEuropean Economic CommentEurozone: Risk of negative GDP growth in Q4We see significant downside risk to our Q4-23 GDP estimate of +0.1% q/qFollowing today's release of Eurozone industrial production for November (-0.3% m/m; -6.8% y/y, more details below), we now have around ⅔ of "hard" data for Q4 2023 (in addition to a complete set of soft data), which allows us to fine-tune our estimate for Q4 2023 Eurozone GDP growth, which will be released on 30 January. The available data for industrial production, retail sales and construction (all until November) signal flat (0% q/q) GDP growth in Q4, below our official estimate of +0.1% q/q. As regards soft data, despite the upward revision in the Composite PMI for December, which showed stabilisation rather than decline, the average Composite PMI in Q4 was below the Q3 average (47.2 vs 47.5). This, according to our calculations, signals GDP contraction of around 0.2% q/q in Q4 2023, which following already negative Q3 would imply technical recession. Altogether, the available data implies divergence between "soft" vs "hard" data similar to the one observed in Q3 2023, when the actual GDP outcome of -0.1% q/q turned out to be closer to "soft" data indications, which underperformed the hard data. Crucially, all three GDP trackers (hard (0% q/q), soft (-0.2% q/q) and mixed data (-0.2%)) point to weaker Q4 2023 growth than our and the ECB's December forecast of +0.1% q/q. Adding to the evidence for negative Q4 GDP growth in the Eurozone are early estimates by destatis for Germany, which suggest that German Q4 could have declined 0.3% q/q (while prior quarters were revised up).Growth outlook for coming quarters remains challengingLooking ahead, the Eurozone growth outlook for the coming quarters remains challenging, with key headwinds from restrictive ECB monetary policy, a weak external environment and fiscal consolidation. According to recent ECB estimates, the negative impact of tighter monetary policy started to affect Eurozone activity as of Q3 2022, increasing over the course of 2023. At the same time, labour market resilience and the recovery in real wage growth should support household consumption (55% of GDP) and hence broader GDP growth. While this is yet to show up in hard data such as retail sales, first positive signs of this can be seen in consumer confidence and car sales. Against this backdrop, we expect Eurozone GDP growth of 0.6% in 2024 (consensus: 0.5%) before rebounding to 1.2% in 2025 (consensus: 1.4%). However, we view the balance of risks to our 2024 forecast as skewed to the downside, not least due to significant downside risk to GDP in Q4 2023, which would imply lower statistical carry over to 2024. Our forecast is consistent with some pick up in GDP growth in Q1 2024 (+0.2% q/q) followed by another ...
