Market Economics | Interest Rate Strategy - BNP PARIBAS ...

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