In the final estimate the GDP growth in the Euro area for the second quarter of 2024 was revised down 10 basis points to 0.2% on a quarterly basis. Domestic demand, meanwhile, contracted: on a quarterly basis, household consumption fell by 0.1% and fixed investment by 2.2%. Government spending grew by 0.6% on a quarterly basis. Net trade, meanwhile, contributed +0.5 percentage points to GDP growth. This is what Nomura in the report “Tourism is keeping the euro area afloat”.
The data suggests that the most of the contribution of net trade came from exports of services (tourism, in particular). It seems that tourism is keeping the euro area afloat, a trend that Nomura estimates will continue in the third quarter of 2024.
Not a good start for the third quarter of 2024
There industrial production July in Germany is decreased by 2.4% on a monthly basis, in line with the substantial weakness in industrial sales in July. Assuming no growth in August and September, German industrial production for the third quarter would contract by 2.2% on a quarterly basis and imply a contribution of -0.6 points percentages to the German GDP growth for the third quarter (almost -0.2 percentage points compared to the euro area GDP). However, manufacturing surveys suggest that Germany’s industrial decline continues. In this scenario, Nomura reiterates the existence of a concrete risk of recession for Germany.
There Francein the meantime, chasing GermanyIndustrial production in July is decreased by 0.5% on a monthly basis. Assuming no growth in August and September, French industrial production would contract by 0.7% on a quarterly basis in the third quarter of 2024, providing a contribution of -0.1 points percentages of growth of the French GDP in the third quarter. That said – Nomura underlines – “we expect French GDP growth in the third quarter to receive a driven by tourism following the Olympics which will most likely offset the weakness in the French industrial sector. The strong risk of a German recession and the weakness in France will be a substantial drag on Eurozone GDP growth in the third quarter. We believe, however, that the Periphery will outperform and that tourismin particular, will play a important role in preventing a contraction of Eurozone GDP growth in the third quarter.
ECB: growth concerns
In addition to today’s data on spending as a percentage of GDP, the ECB published data on income per employee and on unit profits for the second quarter of 2024. Income per employee is increased by 4.3% on an annual basis, i.e. 80 basis points less than the ECB forecast. unit profits I am decreased by 0.7% year-on-year, 10 basis points above the ECB’s expectations. It is important to note that both of these data sets were released after the ECB’s September forecasts were finalised, and so will not feed into the projections for next week’s release. However, unit profits were broadly in line with the ECB’s expectations, and we should expect – Nomura notes – that the ECB has reduced its compensation by employee profile following the material slowdown in negotiated wage growth in Q2 2024 (down to 3.6% from 4.7% in Q1). Companies are increasingly citing the lack of demand as a factor that discourages them from producing more (the ECB will cut as the wage-price spiral reverses). This translates into a weaker pricing powerforcing firms to absorb higher input costs – wages, energy prices, transport rates, etc. – into profit margins. This is because firms are largely unable to pass on the increased input costs to consumers. Data on compensation and unit profits suggest that the ECB can worry less about inflation.
For the future, the attention of the ECB will probably be addressed to negative fears for growthfollowing the contraction in euro area domestic demand in the second quarter and rising risks of a German recession. Today’s data strengthens the case for an ECB cut in September. Weakness in measures of wage growth (negotiated wage growth, compensation per employee), falling domestic demand and rising recession risks in Germany could lead some ECB members to question whether they should start increasing the pace of cuts to once per meeting, including the October one.
