The Euro Area’s GDP Is Worse Than It Looks

On Tuesday, Eurostat published its “preliminary flash estimate” for development in gross home product in the first three months of this 12 months. Several national figures organizations, including those of France, Italy, and Spain, also released preliminary estimates. While revisions could change the picture, the first reading is that the problem has not yet improved.

The headline quantity is that GDP in the first quarter of 2019 was 0.4% bigger than in the fourth quarter of 2018, or 1.6% at an annual rate. That comes even close to a 0.7% annual average growth rate in the next half of 2018. Unfortunately, the initial readings do not include details on the composition of development.

Still, you’ll be able to make some educated guesses. Focus on inventory build up. Businesses want to hold as few inventories as it can be, so any period of stock-building tends to be followed by subsequent drawdowns. Conversely, inventory drawdowns have a tendency to be accompanied by new investments. In the fourth one-fourth of 2018, inventory liquidation across the euro area all together subtracted 0.4 percentage points from the entire growth number.

Then you have the trade balance. Western shelling out for imports from plummeted in the first few months of 2019 overseas, while exports remained flat. Which means domestic production rose more than local demand always. Europeans depended on foreigners for his or her growth because their domestic economy was too weak. The available national data suggest these factors may have flattered the headline growth statistics in the first quarter.

France reported a sizable inventory buildup in the first one-fourth, which helped offset weakness in local investment and home spending. “Internal demand excluding inventory changes” grew at basically the same rate in the first three months of 2019 as in the last three months of 2018, which featured the yellow-vest protests. Italy did not provide a detailed breakdown of growth in the first quarter, but Istat did report “the local component” of the overall economy made “a negative contribution” that was more than offset by online exports. Unlike France, however, it is unclear how much of Italy’s domestic weakness is real or attributable to inventory liquidation.

Italian businesses have been shedding inventories since the second one-fourth of 2018, even as household consumption has organized. If businesses have continued to do this, that would imply an underlying strength in the Italian economy. If inventory deposition has resumed, by contrast, it could suggest the fundamentals have deteriorated. Then there is Spain, which remains the strongest of the best European economies.

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INE reviews the Spanish economy grew at its fastest quarterly rate since 2017. Yet this masks a substantial slowdown in household spending that brought down “national demand” to its slowest growth rate in years. This local slowdown was offset by a massive collapse in imports that dwarfed the large decrease in Spanish exports.

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