German GDP underperformance weighs on Eurozone growth but analysts aren't too concerned

Jasper Jolly
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German GDP growth undershot expectations (Source: Getty)

Eurozone GDP grew at a rate of 0.3 per cent in the third quarter of 2016. The underperformance of the German economy ensured that growth for the region remained stable, but analysts did not see much cause for concern in the face of improving sentiment for the German economy.

Growth was weighed down by unspectacular performances in the EU’s largest economies. Germany’s Federal Statistics Office today revealed that it had experienced a slight fall to 0.2 per cent growth, while Italy’s government managed a slight boost in growth to 0.3 per cent after a stagnant second quarter.

However, the ZEW Indicator of Economic Sentiment for Germany increased substantially in November. The index improved by 7.6 points from October, now standing at 13.8 points, despite a dip after the US election result became clear. It had been forecast to move to 7.9.

France had already reported third quarter growth of 0.2 per cent after actually shrinking by 0.1 per cent in the second quarter. The United Kingdom’s previously announced growth rate of 0.5 per cent helped the wider European Union to outperform the Eurozone, at 0.4 per cent.

Germany’s slowdown continues a downward trend in the past six months. Germany’s economy had recorded stronger growth in the first and second quarters of the year, at 0.7 per cent and 0.4 per cent respectively.

Investment in machinery and equipment also decreased, weighing on growth.The slowdown in German growth was also partially attributed to a low export activity, increasing the country’s reliance on relatively healthy domestic demand.

However, the dip in growth does not dent a broadly positive outlook, according to analysts. “We expect Eurozone GDP growth to improve to 0.4% quarter-on-quarter in the fourth quarter, and would not rule out a pick-up to 0.5%. Early survey evidence for the fourth quarter is largely improved,” said Howard Archer, chief European and UK economist at IHS Markit.

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Eurozone growth faces multiple potential headwinds in the next year. Elections will take place in the Netherlands, France, and Germany in 2017, with anti-trade candidates expected to make significant gains. Italy, meanwhile, faces a new government if Italian Prime Minister Matteo Renzi loses a constitutional referendum on 4 December.

“The political environment could be increasingly problematic for Eurozone growth over the coming months, especially given that the UK’s Brexit vote in June and November’s election of Donald Trump as US President fuels concern over potential political shocks in the Eurozone,” said Archer.

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