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Even a m/m increase of 10% in March, which is very unlikely given that the weather was again unhelpful, would still mean that construction output in Q1 fell by around 12% q/q. On the three occasions in the past two decades that a double-digit q/q contraction has occurred, in Q1 1996, Q1 1997 and Q2 2008, GDP also registered a q/q contraction (Chart 2). In the national accounts for Germany, construction spending accounts for just under half of total gross fixed capital formation on a constant price basis. Its share of GDP on the same basis is roughly 10%. 70 65 60 55 50 45 40 35 30 Chart 3: Manufacturing PMI +1 SD Mean -1 SD PMI Manufacturing: Output Large changes in construction output have not been passed fully into changes in construction expenditure in the past. The pass-through has been about half. Assuming this relationship holds, our assumption of a 13% q/q decline in construction output in Q1 would translate into a 6-7% q/q drop in construction expenditure which, given the latter’s share in GDP, would imply a drag on GDP of 0.6-0.7 of a percentage point. It could be even bigger if construction output fails to rebound strongly in the March release. Trading loss Trade figures in Germany for Q1 to date also augur less well for Q1 GDP than we originally envisaged. The monthly trade surplus almost halved in January, sliding from EUR 16.6bn in December to just EUR 8.8bn, the lowest surplus in almost a year. It partly rebounded in February, rising to EUR12.1bn. But for the quarter as a whole, the surplus is likely to be down by at least EUR 10bn, or around 25% q/q, in comparison to Q4 2009, implying a significant drag on the q/q change in GDP from net exports. Exports collapsed by 6.3% m/m in nominal terms in January and though they rebounded by almost as much in the following month, at best there is likely to be a small q/q increase in exports overall in Q1. This compares to 5%-plus q/q increases in both Q3 and Q4 last year. The poor performance of exports is also likely to be a casualty of the disruption caused by the severe weather given that it is totally out of kilter with other indicators of global trade. The latter point is an important one. While GDP in Q1 is shaping up to be a disappointment, the data on global trade and manufacturing activity signal that the underlying trend in economic activity in Germany is improving substantially. There is a strong likelihood, therefore, that disappointing GDP data for Q1 will be followed by a compensating rebound in Q2. This should certainly be the case for industrial activity data in Germany give the recent surge in a variety of leading indicators. 25 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 Source: Reuters EcoWin Pro Chart 4: EC Consumer Survey: Spending Intentions 7.5 5.0 2.5 0.0 -2.5 -5.0 -7.5 -10.0 -12.5 -15.0 Relative to Mean (Since 1986) 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 Source: Reuters EcoWin Pro Eurozone Germany The most spectacular improvement has come in the German PMI for manufacturing: its output and orders sub-indices have rocketed in recent months, with the former reaching its highest ever level (Chart 3). Stripping out the construction sector, the two months of industrial output data released for Q1 to date are consistent with an overall q/q rise in Q1 of about 1%. A much bigger increase is likely in Q2 on the basis of the leading indicators, with y/y growth rates to go into double digits given favourable base effects. Strong March and April releases will set the tone for Q2 and given the step up in the surveys in those two months, robust output growth in at least one of the months, and probably both, looks a sure bet. Add in the construction sector rebound and Q2 could show exceptional strength in the output side of the national accounts data. Consumer contraction One area of the economy where we did not expect much good news in the short run was on consumer spending. Retail sales data for Q1 have once again been very weak. Ken Wattret 7 May 2010 Market Mover 18 www.GlobalMarkets.bnpparibas.com
Retail sales data from month to month have been, as usual, very volatile. But for Q1 as a whole, sales are down by just shy of 1% q/q in real terms. This is the fifth contraction in the past six quarters and the biggest since Q1 2009. Another q/q contraction in private consumption in Germany beckons: Q1 would be the third in succession, with the y/y rate of change to fall further into negative territory (-0.4% in Q4) given the unfavourable base effects related to the boost to spending from car purchase incentives in Q1 2009. The weakness of consumer spending is a further reason to expect poor GDP figures in Q1 but history tells us that the German economy can grow without much of a contribution from private consumption – we discuss this in more detail below. 2010 adjustment The Bundesbank Monthly Report for April talked of a ‘slight decline’ in GDP in q/q terms in Q1. The Buba’s estimate, like our own, is hampered by the absence of the full set of ‘hard’ activity data for Q1 (production and trade figures for March are due imminently). The distortions due to the weather compound the difficulty in making an accurate forecast. Still, on the basis of the information available, we now forecast a q/q fall in Q1 GDP of 0.2%. But, in conjunction with the downward revision to Q1, we are revising up our estimate for Q2. Initially we had forecast a rise of 0.6% q/q but we now look for an increase in excess of 1% q/q. This necessitates an adjustment in our forecast for 2010 as a whole. We had initially expected growth in Germany of 1.7% in 2010: our revised forecast is for growth of 1.5% (Table 1). This is a bit more optimistic than the forecast from the European Commission, updated this week, of 1.2%. We have adjusted our eurozone GDP forecast profile to reflect the changes made to the German forecast and some changes to our forecasts for other member states. The net result is that we have revised down our forecast for Q1 GDP growth in the eurozone to a rise of 0.1% q/q from 0.3% q/q initially. A rebound is assumed for Q2, of 0.5% q/q. The forecast for 2010 growth is trimmed from 1.0% to 0.9%. This is in line with the estimate from the European Commission. Germany to outperform A key aspect of our forecasts is that while we expect Germany to underperform the eurozone average in Q1, we remain of the view that it should outperform thereafter. Germany is forecast to grow faster than the eurozone in the subsequent quarters and in 2010 and 2011 overall. The likelihood of outperformance beyond Q1 is borne out by the leading indicators. The composite PMI for Germany is well above that for the eurozone and is indicative of q/q growth of around 1%. The German economic sentiment index compiled by the European Commission has also been outperforming. Its rise in April, of over four percentage points, was the second largest in the series’ history. The fundamental picture also favours the German economy outperforming. It is best placed to capitalise on the pick-up in global activity, while it is likely to be much less affected by the sovereign debt crisis in the eurozone. The widening of sovereign yield spreads represents a tightening of monetary and financial conditions for all countries other than Germany which has seen its long-term interest rates fall. This is not to suggest that Germany does not have problems of its own. It clearly does. One is the effect of recent developments on key trading partners in the eurozone. Another is weak consumer demand. But there are some grounds for cautious optimism on the latter. The surveys of spending intentions amongst German households have fared much better than in the eurozone on average over the past few months. The fiscal stance is helpful, as is the performance of the labour market. Even if the survey data do not translate into much of a pick-up in actual spending, as has been the case in the past, then Germany can still prosper without a big contribution to growth from private consumption. In the period from Q4 2005 to Q1 2008, for example, when the last expansion really got going, there was a negligible increase in German private consumption: it rose by a meagre 1.6% cumulatively. But GDP expanded by around 8% cumulatively over the same period, driven in large part by a near-25% rise in exports. The external sector is likely to remain the pivotal influence on Germany’s growth outlook. Table 1: GDP Projections 2009 2010 2011 2009 2010 (1) 2011 (1) Q1 Q2 Q3 Q4 Q1 (1) Q2 (1) Q3 (1) Q4 (1) Q1 (1) Q2 (1) Q3 (1) Q4 (1) Germany % q/q - - - -3.5 0.4 0.7 0.0 -0.2 1.2 0.6 0.3 0.3 0.4 0.5 0.6 % y/y -4.9 1.5 1.8 -6.7 -5.8 -4.8 -2.4 0.9 1.7 1.6 1.9 2.4 1.6 1.5 1.8 Eurozone % q/q - - - -2.5 -0.1 0.4 0.0 0.1 0.5 0.2 0.1 0.3 0.3 0.4 0.5 % y/y -4.0 0.9 1.2 -5.0 -4.9 -4.1 -2.2 0.4 1.1 0.9 1.0 1.2 1.0 1.2 1.6 Source: BNP Paribas Ken Wattret 7 May 2010 Market Mover 19 www.GlobalMarkets.bnpparibas.com
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Page 7 and 8: Eurozone Periphery: Compare and Con
Page 9 and 10: over 20% in Q1) and, last but not l
Page 11 and 12: Market Stress Charts • Signs of s
Page 13 and 14: Chart 7: Greek Bank CDS* 900 Greece
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Page 41 and 42: the gamma sector for some time now.
Page 43 and 44: EUR: Limited Nervousness at ECB Ten
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Page 49 and 50: Table 1: BNP Paribas' Inflation For
Page 51 and 52: Table 3: BNP Paribas' Inflation For
Page 53 and 54: Table 1: BNP Paribas Carry Analysis
Page 55 and 56: What’s the call? It is relatively
Page 57 and 58: Update on FIN SEN and FIN SUB 5/10y
Page 59 and 60: Germany 10y: Within MT falling wedg
Page 61 and 62: Judging Currencies by Liquidity •
Page 63 and 64: type of regulation would reduce mon
Page 65 and 66: Euro Dives • The euro is collapsi
Page 67 and 68: Currency Spot Trade Recommendations
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Economic Calendar: 7 - 14 May (cont
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Key Data Preview Chart 1: US Payrol
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Key Data Preview Chart 5: UK Manufa
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Key Data Preview Chart 9: French GD
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Key Data Preview Chart 13: US Indus
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Treasury and SAS Issuance Calendar
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Central Bank Watch Interest Rate EU
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FX Forecasts* USD Bloc Q2 '10 Q3 '1
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RESEARCH DISCLAIMERS: IMPORTANT DIS
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