The “green shoots” narrative took a hit on Friday.
GDP data out of Europe showed the euro-area economy barely expanding in Q4, as growth decelerated to a minuscule 0.1% pace QoQ, less than the 0.2% the market was looking for. This marks the worst quarter in nearly seven years.
Worse, France and Italy unexpectedly contracted. The French economy shrank 0.1%, versus an expected 0.2% expansion, while the Italian economy contracted 0.3%.
In France, Finance Minister Bruno Le Maire suggested there’s really no problem here, describing the slowdown as “temporary” and noting that were it not for corporates running through inventories as opposed to raising production, the French economy would have expanded 0.3%.
And yet, Paris is still struggling with social unrest and pretensions to a “truce” notwithstanding, Emmanuel Macron may yet find his nation the subject of tariffs from the Trump administration.
That latter point speaks to a broader concern. The euro-zone has been laboring under threat of trade restrictions from Donald Trump for nearly the entirety of the US president’s first term. That Sword of Damocles still hangs over the bloc’s economy.
Italy, meanwhile, is mired in the usual political turmoil and continues to struggle economically. It’s par for the course and, indeed, that’s the problem.
I’m speaking in broad strokes here, and that’s all that’s really necessary on Friday. The fact is, caveats, nuance and country-specific idiosyncrasies aside, “Japanification” has set in. Growth is sluggish (at best) and inflation is a mile away from target.
“As GDP growth fell to a snail’s pace in 4Q and core inflation dropped back in January, today’s data brings a chilling confirmation that the eurozone has not started its growth recovery just yet”, ING said, in an emailed note. “An ECB on autopilot remains the logical conclusion”.
The problem with “autopilot” from the ECB is that negative rates and asset purchases have reached the point of diminishing returns, and these kinds of visuals (see below) are disconcerting.
Christine Lagarde formally unveiled the ECB’s strategic review this month, but the results aren’t due until the end of the year and besides, virtually nobody expects policymakers to have some kind of collective revelation that solves the problems of stagnation.
“Overall, recent optimism around a eurozone growth recovery seems warranted; it’s just all about the timing”, ING went on to say. “Green shoots are likely to have a modest and somewhat delayed effect given the severity of the manufacturing downturn and because downside risks have only moderately subsided”.
In short, what’s needed here is a fiscal response, ideally from Germany, where there’s ample room (and that’s putting it nicely) for stimulus.
Until we get that, the numbers out Europe will almost surely continue to reflect more or less of stagnation. Based on Friday’s numbers for Q4, the final period of 2019 was a “more” quarter.