If you’ve spent the past several months scouring the globe for economic “green shoots”, Europe hasn’t been particularly fertile ground.
The European economy is on the front lines of the global slowdown thanks in no small part to a deep manufacturing slump in Germany, which is itself a product of external demand worries tied to China and Brexit, among other things. Earlier this month, Berlin slashed its growth target for the year to just 0.5%, which looked particularly horrendous compared to the 2.1% expansion the government was looking for as of a year ago. Italy of course fell into a technical recession in Q4.
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Although the services sector has been some semblance of resilient throughout, ongoing signs of weakness have plagued Europe for months, heightening fears that the ECB missed its window to normalize. Just three months after ending net asset purchases, the central bank announced another round of TLTROs.
Given the rather cloudy outlook, it was something of a relief on Tuesday when Eurostat reported that Europe’s economy grew 0.4% QoQ in Q1, double Q4’s pace and ahead of estimates.
That’s two consecutive quarters during which the economy has accelerated (albeit at a slow rate) following last summer’s brush with stagnation.
Perhaps even more encouraging than the broader numbers was a rebound in Italy, where the economy expanded 0.2% in the first quarter.
The downturn in the bloc’s third-largest economy threatened to exacerbate an already fractious political situation and it also set the stage for another budget battle with Brussels. Many feared the recession likely lasted into Q1, so today’s data will be welcome news.
The real bright spot (again) was Spain, where the economy expanded 0.7% for the quarter. Here’s a look at the Q4 versus Q1 comparison:
None of this means the bloc is out of the woods, but Europe will take whatever it can get, and this ain’t nothin’ – so to speak. German GDP will be released next month.
Meanwhile, inflation data painted a similarly upbeat picture, including regional data for Germany.
Remember, the ECB’s forward guidance means markets effectively cannot price in a hawkish outcome between now and the end of the year, and there would have to be an epic inflection in the data for that forward guidance to be walked back or otherwise watered down. It’s possible that better data ends up influencing the terms around the new TLTROs (and there are already worries they won’t be generous “enough”), but GDP numbers won’t be the deciding factor there.
If anything, better-than-expected data helps obviate the need for the ECB to have the thorny tiering debate around rates. The bank’s generalized dovish stance won’t change in the near-term, which means good news is just good news. Knock on wood.
