The Eurozone exited recession in the third quarter of 2009 after five quarters. Contraction had been particularly deep in the first quarter of 2009 and the fourth quarter of 2008 when global economic activity and trade nosedived amid financial sector turmoil following the collapse of Lehman Brothers. However, in the third quarter of 2009 Eurozone GDP expanded by 0.4% quarter-on-quarter (q/q), thus matching IHS Global Insight's November forecasts. This follows declines of 0.2% q/q in the second quarter and a record 2.5% q/q in the first quarter. Eurozone GDP had previously contracted by a hefty 1.8% q/q in the fourth quarter of 2008, 0.4% q/q in the third quarter of 2008 and 0.3% q/q in the second quarter. The year-on-year (y/y) decline in Eurozone GDP moderated to 4.1% in the third quarter of 2009 from 4.8% in the second quarter and a record 4.9% in the first quarter.

Germany at the Forefront of Eurozone Recovery

The majority of the Eurozone economies that have released third-quarter GDP data achieved growth. Indeed, Germany expanded for a second successive quarter and at a significantly increased rate of 0.7% q/q. The German economy had previously expanded by 0.4% q/q in the second quarter following four quarters of contraction, including a 3.5% q/q plunge in the first quarter of 2009. The y/y drop in German GDP slowed to 4.8% in the third quarter from a peak of 6.7% in the first. German exports were particularly hard hit by the collapse in world trade in late 2008/early 2009, but are now benefiting from improving trade and more favourable inventory developments.

France also achieved a second successive quarter of expansion in the third quarter, but growth failed to accelerate as GDP grew by 0.3% q/q as it did in the second quarter. This too followed four quarters of contraction through to the first quarter of 2009, although the recession was shallower than in Germany. The y/y decline in French GDP narrowed to 2.4% in the third quarter from a peak of 3.5% in the first quarter.

The Italian economy exited recession as GDP rose by 0.6% q/q in the third quarter after the rate of contraction had previously moderated to 0.5% q/q in the second quarter from 2.7% q/q in the first quarter. The Italian economy contracted for five quarters in all and GDP was still down by 4.6% q/q in the third quarter.

The Netherlands also returned to growth in the third quarter as GDP expanded by 0.4% q/q following four quarters of contraction, including GDP declines of 1.0% q/q in the second quarter of 2009 and 2.4% q/q in the first. The y/y decline in Dutch GDP moderated to 3.7% in the third quarter from a peak of 5.4% in the second quarter.

Elsewhere, the return to growth in the third quarter was particularly pronounced in Austria where GDP expanded by 0.9% q/q following contraction of 0.5% q/q in the second quarter and 2.6% q/q in the first. This caused the y/y decline to narrow to 3.4% in the third quarter from 4.9% in the second quarter. Portugal also achieved expansion of 0.9% q/q in the third quarter after returning to growth in the second quarter when GDP increased by 0.5% q/q. The y/y decline in Portuguese GDP narrowed to 2.4% in the third quarter from 4.0% in the first quarter. Meanwhile, Belgium expanded by 0.5% q/q in the third quarter following four quarters of contraction. Consequently, the y/y decline in Belgian GDP narrowed to 3.5% in the third quarter from 4.2% in the second. Slovakian GDP rose by 1.6% q/q in the third quarter after recovery started in the second quarter with expansion of 1.1% q/q. Even so, Slovakian GDP was still down by 4.9% y/y in the third quarter.

However, Spain remained in recession in the third quarter as GDP declined by 0.3% q/q. This was a fifth successive quarter of contraction, but at least it was down from GDP falls of 1.1% q/q in the second quarter and 1.6% q/q in the first. Year-on-year, Spanish contraction moderated to 4.0% in the third quarter from a record 4.2% in the second. Despite substantial government stimulus measures, Spanish recovery prospects continue to be limited by corrections in the housing and labour markets, as well as the construction sector. Greece GDP also fell by 0.3% q/q in the third quarter, which was a fourth successive decline, and left GDP down 1.6% y/y. In contrast to other Eurozone countries, Cyprus' recession actually deepened in the third quarter as GDP contracted by 1.4% q/q and 2.7% y/y.

Exports and More Favourable Inventory Developments Lift Activity

Eurostat has yet to release a component breakdown of Eurozone GDP for the third quarter of 2009, but it is evident from all of the countries that have released data that a marked increase in exports contributed significantly to the return to growth—although the positive impact from net trade was limited by higher imports. It also appears that more favourable inventory developments across the region helped matters as stocks were either cut at a reduced rate or were even starting to be re-built. Evidence on investment is somewhat mixed. For example, the German Federal Office reported a significant rise in capital expenditure on machinery and equipment and on construction, but France suffered further marked contraction in total investment. Overall, though, it seems likely that investment contracted at a reduced rate across the Eurozone in the third quarter.

However, consumer spending likely saw little or no growth across the Eurozone in the third quarter. The German Federal Statistics Office indicated that it fell during the quarter, while it was only flat in France. Furthermore, it is known that Eurozone retail sales volumes fell by 0.7% q/q in the third quarter, although this does not include car sales, which have lifted markedly in a number of countries through car-scrappage schemes.

Outlook and Implications

The latest Eurozone data and survey evidence shows ongoing overall improvement, thereby indicating that the region is on course for further reasonable expansion in the fourth quarter. In particular, the composite indicator for the Eurozone purchasing managers' manufacturing and service sector surveys, compiled by Markit Economics, rose to a 22-month high of 53.0 in October. This marked the third successive month that the indicator was above the critical 50.0 level signifying stable activity. The manufacturing survey showed overall activity expanding in October for the first time since May 2008, while the service sector survey pointed to business activity expanding for a third month running in October and at the fastest rate since December 2007. Meanwhile, overall Eurozone economic sentiment rose for a seventh successive month in October to reach a 13-month high, with both consumer and business confidence improving significantly overall. However, concerns remain over the strength of consumer spending, with the latest data showing that Eurozone retail sales volumes fell by 0.7% m/m and 3.6% y/y in September.

Eurozone economic activity is being lifted by the monetary and fiscal stimulus measures that have been enacted in addition to the support provided to banking sectors. Furthermore, low consumer price inflation/deflation is boosting consumers' purchasing power. Meanwhile, inventory developments are now becoming generally more favourable. Stocks are either run down at a reduced rate after being slashed in late 2008/early 2009 or are even starting to be rebuilt in a number of countries. In addition, Eurozone exports are now showing signs of improvement as global economic activity and trade picks up.

Nevertheless, we suspect that the Eurozone's recovery could well lose some momentum for a while in 2010 before growth starts to gradually pick up again. This loss of momentum is expected to be the consequence of the withdrawal of some stimulus measures, including car-scrappage schemes and employment support measures. Moreover, inventory developments could start to become less positive towards the middle of 2010, while the strong euro, high and still rising unemployment, and persistent tight credit conditions amid still significant financial sector problems are also seen as weighing down on Eurozone growth prospects. We also suspect that global growth could falter for a time during 2010, thereby limiting Eurozone exports.

Consequently, in our November forecast we have projected that Eurozone GDP would contract by 3.9% in 2009. GDP is now seen falling by 4.9% in Germany, 2.2% in France, 4.7% in Italy, 3.7% in Spain and 4.1% in the Netherlands. Eurozone GDP is expanding 0.9% in 2010, led by growth of 1.5% in Germany. France (1.2%), Italy (0.8%) and the Netherlands (1.1%) are expected to grow in 2010, but further GDP contraction is expected in Spain (0.7%). Over the longer term, Eurozone growth is likely to be limited by the need for a substantial tightening of fiscal policy in a number of countries. However, the likely fragility of the recovery means that both governments and the ECB need to be wary about withdrawing stimulus measures too soon or too aggressively.

Global Insight (Reino Unido)