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Prospects Weekly: Q3 Euro Area GDP growth remained positive

Global Macroeconomics Team's picture

Despite escalating debt concerns, Q3 Euro Area GDP growth remained positive mostly on account of robust growth in the two largest economies Germany and France. Q3 GDP growth was even stronger in the US, Japan and China (all of which benefitted from the post-Tohoku bounce back), with consumer spending also being an important growth driver. Reflecting weak consumer spending in the Euro Area, retail sales fell in October. Forward looking indicators suggest that growth prospects for the Euro Area remain dim, and with the EU being a major trading partner for many countries this reduces prospects elsewhere. In anticipation of the slowdown, monetary policy tightening has declined significantly in developing countries, although tightening continues where inflation remains above-target.

Euro Area member states grew modestly and unevenly in Q3, but recession looms ahead. Euro Area GDP was up 0.8% (q/q, saar) in Q3. Much of the increase was driven by Germany (2%, q/q saar) and France (1.6%, q/q saar), while periphery countries registered significant declines. Q3 GDP growth was even stronger in the US (2.5%, q/q saar) and Japan (5.5%, q/q saar). Reflecting uncertainty related to the debt crisis and fiscal austerity across the Euro Area, Q4 growth prospects for the Euro Area are dim. European business surveys in October show production and order books pointing towards recession, while stocks of unsold finished goods remain high. The EC forecasts Euro Area Q4 GDP to contract by 0.4% (q/q, saar) and to stagnate in 2012 Q1. Developing country exports to the EU will be impacted.

 

Strength of consumer spending diverges across regions. Consumer spending in the third quarter provided significant support to GDP growth in Germany, France, and the United States (1.72 percentage point contribution to GDP). October releases of retail sales data show momentum growth on the upside for the United States (supported by a pick-up in consumer sentiment since August and moderate job creation), and moderating in China and Japan (where retail sales growth is stabilising from the post-Tohoku bounce back). However, retail sales in the Euro Area declined in October, with momentum growth dipping towards a deceleration, as consumers faced with job fears related to the ongoing Euro Area debt crisis and fiscal austerity, hold back on spending.

 

The pace of monetary tightening in developing countries slows. As inflationary pressures abate and the global economy slows down, the number of developing countries tightening monetary policy has fallen sharply. In recent months some of the larger developing countries (Brazil, China, Indonesia, Russia, and Turkey) have moved from tightening to a neutral or looser monetary stance. Elsewhere, interest rate hikes continued in developing countries where inflationary expectations remain elevated (Bangladesh, India, Kazakhstan, Ethiopia, Nigeria, Tanzania, Vietnam) and where price pressures continue to be felt (e.g in East Africa). Indeed, interest rates in Kenya and Uganda have been increased by atleast 800bps over the past two months.

 

Source: Thomson Datastream and World Bank DEC Prospects Group

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