A 0.6% contraction in Euro zone GDP in the December quarter of 2012 was a disappointing result. That took annual growth to -0.9% for calendar 2012. Annual average growth came in at -0.6%, weaker than our long-held forecast of -0.5%.
The softer than expected result in Germany
where GDP also contracted 0.6% in the quarter was especially
disappointing. We don’t have a full
breakdown of the result yet (that comes later in the month), but it appears the
weakness came through in business investment and net exports. France was also softer than expected with a
q/q result of -0.3%, although it appears much of the weakness was in inventories. Germany was the only major country in Europe
that had a positive annual rate of growth in 2012.
The disappointment in this result is
tempered by the fact that the forward look data is improving. Importantly PMI data and business confidence
are improving, although less so in France. Also, with the recent reduction in
risk premia in Europe the cost of capital is lower and credit conditions are
improving. We expect that to support
economic activity in the period ahead.
However, we don’t expect that to lead to an
across the board increase in activity.
We think Germany has passed the low point in the cycle, but the
periphery is still bearing the brunt of front-loaded austerity. And despite the recent weakness in France
being due to de-stocking, which should be good for production in the period
ahead, PMI data is not indicating a recovery in activity anytime soon. Recent strength in the Euro will also have a
dampening effect on export growth.
I remain happy with the view that Euro zone
will remain relatively flat in GDP growth terms for the first half of 2013
before a modest recovery emerges in the second half.
Japan fourth quarter GDP was also released
this week and also came in softer than expected. Activity contracted -0.1% q/q (-0.4%
annualised). Average expectations were
for a q/q increase of +0.1%. The
recently announced fiscal stimulus package gives me confidence in my forecast
of +1.0% GDP growth in 2013. The weaker
Yen and stronger global growth this year should also support exports.
New Zealand fourth quarter 2012 retail
sales were released this morning and showed a whopping 2.1% q/q increase. Core
sales (i.e. excluding motor vehicles) were up 1.5%. This result follows a
revised -0.2% in the third quarter (previously -0.4%). All else being equal that result shifts my
fourth quarter GDP forecast from +0.7% q/q to +0.9%, but there’s a lot more
partial data to come.