Market Overview

Developed Europe: Economy Trends Update April 2017


Recovery Strengthens Powered by Faster Growth in Germany


Developed Europe made a steady start to 2017, providing more signs of a strengthening recovery in the region. During the first quarter, the combined GDP of the 19-nation Euro-zone, which accounts for a large part of the developed Europe economy, expanded 0.5% from the previous quarter and 1.7% from the same period a year ago. Not surprisingly, Germany and Spain continued to be the outperformers among Euro-zone members. In fact, Germany contributed to the overall Euro-zone momentum in two ways. Its strong growth improved the Euro-zone’s GDP data while the country’s increasing imports of intermediate goods powered several other regional peers like France, Italy and Spain.

During the review period, business activity in the Euro-zone remained robust – the purchasing managers’ index compiled by data firm IHS Markit for the single-currency area reached a six-year high in April. There was renewed momentum in the export sector too – shipments of goods outside the Euro-zone jumped 13% year-on-year in March. The labor market also had its own share of positive developments. In April, the Euro-zone’s seasonally-adjusted unemployment rate declined to 9.3%, its lowest level since the financial crisis.

On the whole, the latest set of positive data has rekindled confidence in the Euro-zone’s recovery, which appeared to be vulnerable at the start of the first quarter amid a spurt in oil prices as well as uncertainties related to Brexit, national elections in several countries and the trade policies of the new U.S. administration. In fact, encouraged by the optimism, the European Commission has raised its 2017 growth forecast for the Euro-zone from 1.6% to 1.7%.

At a Glance

Germany:Germany’s GDP increased 0.6% between January and March, clocking its fastest pace of growth since the first quarter of 2016. Adding to the cheer, all the domestic growth drivers contributed to the performance.

The U.K.:Britain’s GDP increased only 0.2% in the first quarter compared to the 0.7% expansion registered in the fourth quarter. Depressed services sector activity largely led to the loss of momentum.

France:For the January-March period, the French economy clocked 0.3% growth quarter-on-quarter, a slower pace compared to the fourth quarter’s 0.5% expansion.

Italy:Between January and March, the Italian economy expanded 0.2% from the previous quarter and 0.8% from a year ago. The comparable figures for the fourth quarter of 2016 were 0.2% and 1.0%, respectively.

Spain: At the end of March, Spain’s quarter-on-quarter GDP growth stood at 0.8%, a notch higher than the 0.7% expansion recorded in the fourth quarter.



Germany powered ahead in the first quarter, helping sustain the current optimism around the wider European economy. GDP in the country increased 0.6% between January and March, clocking its fastest pace of growth since the first quarter of 2016. Adding to the cheer, nearly all the domestic growth drivers contributed to the performance. This is a trend that emerged in the previous quarter, and it underscores the broad-based nature of Germany’s economic momentum now. Indeed, private investment increased, exports surged, and both public and consumer spending remained robust, proving Germany’s ability to shrug off rising trade protectionism and heightened political risks ahead of its September federal election.

Among industrialized nations, Germany is now in the enviable position of benefiting from a whole range of helpful factors. A low unemployment rate and robust wage growth continue to drive consumer spending in the country, while sound public finances and surging tax revenues have enabled the government to stimulate the economy with higher spending whenever necessary. According to the latest government projections, tax collections for 2017 are likely to be at least 8 billion euros higher than estimated earlier in November. German businesses too appear to be immensely motivated to continue investing in equipment and machinery in their quest for higher digitization and competiveness in the global markets. Besides, they are also making the most of ultra-low interest rates in the Euro-zone and a favorable currency exchange situation.

Not surprisingly, the Munich-based Ifo institute’s index of business sentiment in Germany reached an all-time high recently, painting a rather optimistic outlook for the economy in the medium term. In particular, the institute described the mood in Germany’s all-important manufacturing sector as exuberant and said that order books appeared to be “filling up rapidly.”


Britain, it appears, has finally begun to feel the impact of its decision to leave the EU. After holding out well in the two quarters following the June 2016 Brexit vote, the economy experienced significantly subdued activity in the first quarter. Output in the country increased only 0.2% during the period compared to the 0.7% expansion registered in the fourth quarter. According to the U.K.’s Office for National Statistics, depressed services sector activity largely led to the loss of momentum in the wider economy. The services sector, which accounts for as much as 78% of Britain’s GDP, expanded only 0.3% during the first quarter, a substantially slower pace compared to the 0.8% growth registered at the end of 2016.

The pound has been on a downtrend in the uncertain economic climate prevailing in post-Brexit U.K., which has made imports costlier for Britons and pushed up inflation (annual inflation climbed to a four-year high of 2.7% in April). Against this backdrop, economists had projected slower output growth for the U.K. in the first quarter. However, the intensity of the growth deceleration in the review period turned out to be worse than expected.

On a positive note, though, the short-term outlook for the British economy seems to be more encouraging than the first-quarter GDP data suggests. For instance, there are signs that the first-quarter weakness in service sector activity may not persist. Official data show retail sales bounced back in April and the latest survey of purchasing managers indicates renewed services sector momentum. What’s more, the pound’s depreciation is acting as a strong tailwind for Britain’s export sector. Although the volume of exports has not changed much in recent months, the value of the U.K.’s shipments abroad has jumped nearly 15% in annualized terms due to the pound’s weakness.


Following a solid fourth quarter, France lost a bit of its momentum during the first quarter as it headed for the final phase of a closely contested, highly unpredictable presidential election in April-May. For the January-March period, the economy clocked 0.3% growth quarter-on-quarter, a slower pace compared to the fourth quarter’s 0.5% expansion. In annualized terms, GDP increased just 0.8% at the end of March, the lowest growth rate recorded since 2014.

According to French statistical institute Insee, household spending merely inched up 0.1% and exports fell 0.7% between the fourth quarter of 2016 and the first quarter. In sharp contrast, both household spending and exports had climbed 0.6% and 1.4%, respectively, during the fourth quarter. On a positive note, business investment soared 1.3% in the first quarter, propping up the economy amid the slowdown in household spending and exports.

Nevertheless, it is important to note that neither the surge in investment nor the weakening of consumption are a sign of any future trend. Consumption barely improved in the first quarter largely because households’ spending on energy for heating fell drastically due to unseasonably warm weather, while business investment jumped as firms increased spending before the expiry of a tax write-off for expenditure related to new equipment.

Moving forward, the outlook for the French economy appears to have brightened with the election of Emmanuel Macron as President. Mr. Macron, who served as economy minister for two years under his predecessor Francois Hollande, is considered more market friendly compared to his losing opponent since he has promised to boost growth and employment through labor market reforms and tax cuts for the self-employed.


Amid a brightening outlook for much of the Euro-zone, Italy recorded a set of rather lackluster data during the February-April period. The statistics institute ISTAT reported that between January and March, the Euro-zone’s third largest economy expanded 0.2% from the previous quarter and 0.8% from a year ago. The comparable figures for the fourth quarter of 2016 were 0.2% and 1.0%, respectively, which points to the fact that in early 2017, Italy failed to create an impetus for faster growth. Adding to the pessimism, this time too, the Italian economy’s pace of expansion lagged the Euro-zone average growth rate of 0.5%.

According to the Bank of Italy (central bank), the Italian economy was largely driven by robust service sector activity during the first quarter. Unfortunately, the central bank also believes that industrial output diminished from the fourth quarter, likely ending the momentum garnered in the industrial sector during the second half of 2016.

Labor market data too disappointed. Italy, which has been hobbled by double-digit unemployment rates for close to five years now, saw its seasonally-adjusted unemployment rate edge up to 11.7% from 11.5% between February and March. The saving grace though was that the youth unemployment rate (among jobseekers in the 15-24 years range) fell from 34.5% in February to 34.1% in March, its lowest level since early 2012.

Overall, the entire set of recent data is evidence that bogged down by a troubled banking sector, high levels of unemployment, a large public debt and political uncertainty, Italy has not been able to achieve a sustained recovery. Discouragingly, the European Commission has said that Italy’s public debt is expected to rise again this year. What’s worse, given the country’s economic situation, Rome has decided to postpone its planned move to begin cutting debt.


Spain’s recovery over the past three years has been so strong and consistent that a robust set of data from the country every quarter-end is almost a given. In the first quarter too, the nation’s growth data exceeded expectations, which is yet another proof of the Spanish economy’s ability to withstand a host of problems, including high unemployment, a subdued external trade climate and domestic political uncertainty. At the end of March, Spain’s quarter-on-quarter GDP growth stood at 0.8%, a notch higher than the 0.7% expansion recorded in the fourth quarter. Year-on-year, output increased 3%, again a robust pace of growth for any country in the industrialized world.

WWhat’s even more encouraging is that a renewed momentum in exports contributed significantly to first-quarter growth. Between January and March, exports climbed 8.4% from the same period last year and 14.1% from the fourth quarter of 2016. This is a welcome development especially since household spending, which has been driving the economy for several quarters now, appears to be weakening. The positive impact of better financing conditions and lower fuel prices on Spanish consumers has started to diminish, and moving forward, any slack in consumption is expected to be picked up by rising exports.

Fortunately, the near-term outlook for Spain’s export sector looks bright. Spanish firms are believed to be relatively better placed now to compete in the global markets, given the series of reforms and structural improvements Madrid has implemented over the past few years. Secondly, Spain’s biggest export market, the wider European Union economy, has been on the mend for a while now. Not surprisingly, in the first quarter, Spain’s shipments to European Union nations accounted for two-thirds of its exports.


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