Euro-Area Growth Revised Lower in Sign of Recovery Fragility

  • Economy expanded 0.4% in fourth quarter versus 0.5% estimate
  • GDP rose less than forecast in Germany, Italy, Netherlands

The euro-area economy expanded less than initially reported in the fourth quarter as growth in three of its largest economies fell short of expectations and Greek output unexpectedly shrank.

Gross domestic product rose 0.4 percent in the three months through December, the European Union’s statistics office in Luxembourg said on Tuesday. That is below a Jan. 31 estimate and follows an increase of 0.4 percent in the previous quarter.

The data highlight the fragility of the 19-nation economy’s recovery. After the currency bloc weathered global uncertainty last year, the outlook for 2017 is clouded by higher oil prices, a surge in populism ahead of elections in some of the region’s largest economies, and trade risks related to Brexit and U.S. policies.

“Higher inflation is likely to weigh on disposable incomes and private consumption,” said Matthias Thiel, an economist at BNP Paribas in London. “We don’t have a lot of details, but the comments from the German statistics office suggest that the miss was due to strong imports. That, in turn, implies that underlying growth remained quite strong.”

The euro was little changed after the report and traded at $1.0617 at 11:38 a.m. Frankfurt time.

Fourth-quarter performances fell short of analysts’ forecasts in Germany, Italy and the Netherlands, three of the region’s five-largest economies. Greek output contracted 0.4 percent, compared with estimates for a 0.4 percent increase. Eurostat confirmed the pace of growth in Spain and France in the final three months of 2016.

Andreas Rees, an economist at Unicredit in Frankfurt, predicts that the downward revision of euro-area growth is mainly due to Germany’s performance, which was damped by the timing of Christmas holidays.

“It is a technicality which will be corrected,” he said. “Fundamentals look solid. An acceleration in global trade is in the pipeline.”

Downside Risks

That’s unless President Donald Trump follows up on threats to tear up free-trade treaties. At home, accelerating inflation -- the rate rose to 1.8 percent in January -- may hit consumer spending. Business confidence could also be hit by a resurgence of Greece’s debt crisis and political instability in the course of a year that will see Germany, France, the Netherlands and possibly Italy go to the polls.

In a sign of mounting concerns, German investor confidence declined more than forecast in February. A gauge by the ZEW Center for European Economic Research in Mannheim published Tuesday fell to 10.4 from from 16.6, compared with a median estimate of 15.

European Central Bank officials argue that monetary stimulus remains crucial in sustaining the recovery. President Mario Draghi has pledged to continue government-bond purchases until at least the end of 2017, and Executive Board member Yves Mersch said the central bank must be a “guarantor of stability” in uncertain times.

In the fourth quarter, “domestic demand continued to support the recovery and this is positive,” said Fabio Fois, an economist at Barclays Plc in Milan. “Going forward, as political uncertainty declines, it should continue to drive growth in 2017 as well.”

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