Euro area Q1 GDP growth weighed by latest pandemic wave and Ukraine war

Chris Scicluna
Emily Nicol

French inflation exceeds expectations; euro area headline inflation likely remained stubbornly high despite lower energy prices, with core rate set to rise to new high
A key focus in the euro area today will be the flash inflation estimates for April. After yesterday’s upside surprise to Germany’s consumer price figures and the sizeable downside surprise to the equivalent Spanish numbers, this morning’s French data exceeded expectations. In contrast to the Bloomberg median forecast of a flat reading, French inflation on the EU harmonised HICP measure rose 0.3ppt to a new high of 5.4%Y/Y. The national measure also rose 0.3ppt to 4.8%Y/Y, the highest since 1985. In part thanks to government policy measures, energy inflation on the national measure dropped 2.6ppts to 26.6%Y/Y. However, as in Germany, inflation of food (up 0.9ppt to 3.8%Y/Y), services (up 0.6ppt to 2.9%Y/Y) and manufactured goods (also up 0.6ppt, to 2.7%Y/Y) was stronger. So, on balance, and in the absence of a significant deviation from the anticipated drop in the Italian HICP rate by 0.2ppt to 6.6%Y/Y, euro area headline inflation looks to have remained broadly steady at the March reading of 7.4%Y/Y. While food inflation is likely to have jumped this month, prices of services and other goods are also set to have risen, to leave the core CPI rate up 0.4ppt to 3.3%Y/Y, a new series high.

French and Spanish GDP figures miss expectations; euro area Q1 GDP growth weighed by latest pandemic wave and Ukraine war
This morning also brings the first estimates of Q1 GDP from the euro area and its larger member states. While the lifting of Covid-related restrictions and reopening of the services sector will have given a boost late in the quarter, the recovery looks to have been curbed to some extent by the Russian invasion in Ukraine in late February, with the subsequent worsening of supply constraints and higher cost burdens weighing on spending by businesses and households alike. Following the downside surprises to the French and Spanish figures, the risks to our forecast of a moderate increase in aggregate euro area GDP in Q1, by 0.2%Q/Q, are skewed to the downside.

Certainly, despite various survey indicators suggesting ongoing expansion in France, this morning’s Q1 GDP numbers from that country fell well short of our expectations, suggesting that the economy stagnated in the first quarter. The expenditure detail implied a more significant negative impact from the latest pandemic than had been expected – for example, spending on hotel and restaurant services fell sharply (by 5.3%Q/Q). And taken together with declines in spending on food, energy and other goods, total household consumption fell a sizeable 1.3%Q/Q to subtract 0.7ppt from GDP growth. So, while fixed investment offered some modest support (0.2%Q/Q) and net trade added 0.1ppt to growth as the recovery in exports (1.5%Q/Q) outpaced that of imports (1.1%Q/Q), it was only thanks to another solid contribution from inventories (0.4ppt) that GDP didn’t contract in the first quarter.

Spanish GDP also came in weaker than expected, with growth slowing to 0.3%Q/Q in Q1 from 2.2%Q/Q in Q4. Like in France, the weakness overwhelming reflected a (perhaps questionably large) 3.7%Q/Q drop in household consumption, which knocked 2ppts off GDP growth. This was offset by another solid increase in fixed investment (3.4%Q/Q) and government spending (1.3%Q/Q), while net trade also added a sizeable 1.3ppts to growth as exports rose a further 3.4%Q/Q to new series high. With Germany more adversely impacted by supply-chain disruptions, the economy looks more susceptible to contraction in the first quarter. And we expect only modest growth in Italy (0.1%Q/Q) at best. This morning will also bring the latest euro area bank lending numbers for March.

UK house price growth slowed, but annual rate remains in double-digits (for now)
Today’s Nationwide house price report suggested a modest slowing in residential property inflation at the start of the second quarter, with prices up just 0.3%M/M in April, the softest monthly increase since September. But this still marked the ninth consecutive monthly increase. So, while down 2.2ppts, the annual rate of inflation still came in at a vigorous 12.1%Y/Y, in double-digits for the eleventh month out of the past twelve. We expect house price growth to remain buoyed to some extent by the persisting demand-supply imbalance in the housing market – indeed, a separate Nationwide survey suggested that a striking 38% of respondents were either in the process of or considering moving. However, with consumer confidence already near record lows, we would continue to expect the housing market to slow further over coming quarters as the squeeze on household incomes is likely to be intensified by rising mortgage costs as the BoE raises Bank Rate further.

UK business sentiment steady in April, but firms more downbeat about current conditions
The Lloyds business barometer suggested that confidence had stabilised at the start of the second quarter, with the headline sentiment balance unchanged at 33% in April, following the 11ppt drop in March. Similar to the flash PMIs, today’s survey suggested a partial rebound in manufacturing confidence, with the relevant balance up 8ppts following the 19ppt drop in March. But conditions in the services and retail sectors were little changed, with sentiment among construction firms having fallen for the second successive month. And the headline balance masked a further deterioration in the firms’ assessments of current conditions, with the relevant balance down a further 6pts to 26, the lowest reading for more than a year and some 22pts lower than last summer’s peak. While firms remained upbeat about their trading prospects over the coming year, net optimism about wider economic conditions fell for a second successive month. Indeed, amid rising cost burdens, almost 6 in 10 firms anticipated raising their prices. And employment intentions for the coming year eased back again, to the lowest since August 2021, with particular weakness in retail and services.

US employment cost index and monthly spending numbers due
In the US, today brings the latest employment cost index (arguably the most reliable guide to wage pressures) for Q1 as well as the latest monthly personal income, consumption and deflators for March. The quarterly ECI index is expected to have risen by a solid 1.0%Q/Q in Q1 – the third consecutive reading of 1% or more – as pay packages were increased to attract new workers and compensate for higher inflation. But despite expectations of only a modest increase in wages in March, and a decline in new vehicle sales, household spending is expected to have maintained an upwards trend at the end of the first quarter, boosted in part by higher prices. 

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