This morning's eurozone GDP data releases for the fourth quarter make for grim reading. Almost across the board the data has disappointed the consensus, with much deeper contractions in the eurozone periphery providing significant cause for concern. The biggest drop was recorded in Portugal where real GDP collapsed by 1.8% in Q412 compared to the previous quarter, which was beyond the -1.0% consensus estimate, and on an annualised basis is a staggering 7.0% contraction. Though not as severe, the 0.9% q-o-q fall in Italian GDP similarly underperformed the consensus -0.6% reading by a considerable margin.
|Eurozone - Real GDP, % chg q-o-q|
In the core of the eurozone, both Germany and France disappointed with real GDP falling 0.6% and 0.3% respectively compared to the consensus of -0.5% and -0.2%. Although the complete set of data for the 17 member states has yet to be released, the deterioration in economic activity among the majors nonetheless confirms that the eurozone is still recession, with the euro area real GDP estimate coming in at -0.6%, beyond the -0.4% expected. Moreover, the data suggest that the periphery is sinking much faster. Although we expect a turnaround in economic activity this year, which underpins our zero growth forecast for the euro area, this masks a significant disparity between the core and the periphery - the latter being mired in deep recession.
|Euro Rally Takes A Breather|
|Eurozone - Exchange Rate, US$/EUR|
Perhaps providing some relieve for European policymakers, the poor data flow at least took some of the upside pressure off the euro, which plunged following the GDP releases. We stress, however, that this down leg will provide only temporary respite. Even with confirmation of weaker economic growth in Q412, the European Central Bank (ECB) is still in no position to ease policy further. There is realistically only scope for about 50bps in cumulative cuts to the refinancing rate (which the ECB is likely to avoid) and there are no incipient signs of banking sector funding stresses or a Member State (namely Spain) entering a bailout programme, which would otherwise give the central bank the green light to ease policy further. The eurozone is therefore at risk of enduring a low-growth period in 2013, accentuated by a relatively expensive currency.