EMU Q2 GDP contracted by 0.2% qoq. France avoided a fall in output and Germany grew at a solid pace, but Italy and Spain are still in the doldrums. The GDP reports of the big four economies reveal substantial weakness. In Spain and Italy in particular the recession is here to stay, at least until year-end. Spain has contracted for three consecutive quarters and Italy for four, and both face a long journey to find a new equilibrium. By contrast, Germany remained the outperformer and grew 0.3% and France was flat. Although, we do not have the full details about the components of demand, in France and Germany the traditional growth engines appear to be spluttering. In France, consumer spending fell and in Germany investment contracted.

German net exports remain positive, for now. But as export orders declined and the purchasing managers’ new export orders nosedived it came as no surprise that positive net exports were driven by low imports. Given the uncertainties in financial markets and the lull in the global economy, we lower our forecast for Germany’s quarterly growth rates to 0.1% in both Q3 and Q4, from +0.4% and +0.2% respectively. This gives the same year-on-year growth rate for 2012 of +0.8% as before, due to stronger H1 performance. With a statistical underhang our 2013 GDP forecast is also lowered to 0.8% from previously +1.0%.

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Published with kind permission of Deutsche Bank Research.