Euro area GDP report: unbalanced
Today Eurostat released their estimate of Euro area growth for the first quarter of 2011. The economy grew smartly, or 0.8% on the quarter on a seasonally- and working day- adjusted basis. On the face of it, Euro area growth, which is 3.3% on an annualized basis, dwarfs the 1.8% seen in the US economy. Really, though, it’s joint German and French growth that tower US Q1 GDP growth.
Eurostat doesn’t explicitly highlight how inordinately unbalanced is growth across the region in their report . Germany and France alone accounted for roughly 72% 78% of the quarterly growth of Euro area GDP.
(As I highlight below, the Euro area quarterly growth rate in the chart is slightly different to that in the Eurostat report since some euro area members are missing. The cross-sectional contribution should be roughly unchanged during the revisions, though.)
Update: This chart has been re-posted with only slight modifications from the original. It does not change the article’s premise in any way. H/T to Philippe Waechter in comments below.
If final demand was growing so quickly in Germany, I would say that the Euro area is adjusting more healthily than I had expected. Spenders become savers and vice versa, and capital flows adjust current account balances (and trade) accordingly. Germany spends more at home and abroad, while the Periphery less so. This does seem to be occurring according to the Federal Statistical Agency:
In a quarter-on-quarter comparison (adjusted for price, seasonal and calendar variations), a positive contribution was made mainly by the domestic economy. Both capital formation in machinery and equipment and in construction and final consumption expenditure increased in part markedly. The growth of exports and imports continued, too. However, the balance of exports and imports had a smaller share in the strong GDP growth than domestic uses.
Euro area average growth is likely slow down a bit, as the global economy moves toward a tightening bias and fiscal austerity clenches demand further. However, the outlook for the Euro area as a whole does look increasingly reliant on the trajectory of German and French economic conditions. This is a risk, especially since Germany is an export-driven economy.
As a comparison, 2005 saw growth as broadly more balanced, where Germany and France contributed a smaller 50% to total Euro area growth.
The Q1 2011 growth trajectory (top chart) is entirely consistent with ECB targeted at the core countries.
Rebecca Wilder
How much of the German and French contribution stems from their weight in the index and how much is due to their more rapid growth rates?
GDP growth for Euro Area is not 0.95 % but 0.83 %. German GDP growth explains more than 50 % of Euro area growth which is larger than German weight in Euro GDP (about 30 %). France has a contribution that explains 25 % of Euro area growth which is larger than French weight in Euro GDP (21 %).
The main weakness of Euro area figures comes from Italy and Spain. They are heavy weights in Euro GDP (16 and 10 % respectively) but Italy’s contribution explains just 2 % Euro area Growth and Sapin 3 %.
Other countries have a contribution that explains GDP growth close to their weight in Euro GDP
Philippe,
Thanks for answering Spencer’s question. The chart illustrates growth ex several countries which did not report on the month. That’s one reason why the euro area growth is different from the 0.8% from the release. This was mentioned in the chart, and in the text (As I highlight below, the Euro area quarterly growth rate in the chart is slightly different to that in the Eurostat report since the base has not been revised.).
As you can see in the second chart, Germany’s weight in a more ‘normal’ year is around 1/3, or its share of Euro area GDP. But what you also see is an outsized contribution coming from the bubble countries: ireland, spain, greece, and at the cost of France (slower than weight in index). My point is, that it’s still very unclear that Germany will be able to pull the weight on Euro area growth through to next year.
Rebecca
Rebecca
I just wanted to say that with an Eurostat publication at 0.83 % for the whole Euro Area you cannot work with a number of 0.95 %. What would be Ireland, Malta, Slovenia and Luxembourg growth rate to converge from one to the other number ? Their weight is less than 3 % of Euro GDP.
I agree with you on Germany. For me the main weakness in Euro Area is Italy. A large weight (16 %) but a contribution that is close to 0%.
Philippe
Philippe,
Point taken – but I decided not to manipulate the base GDP number since only the quarterly growth pattern is released at this stage. When you download the data from Eurostat, the Q4 to Q1 trajectory using the level data is not 0.8% bc the base is unchanged and will reflect the 0.8% growth in the next release. The implication of the 0.95% growth implied by the raw data vs 0.8% from the Eurostat first GDP release is that the Q4nbase will be revised upward – i.e., that Q4 growth will be revised upward, probably in Germany, which would make the discrepancy in contributions that much more pronounced. Where do you get your data to quote 0.83% rather than 0.8%? Is there revised base data that I do not see on Eurostat?
I agree, Italy is a wild card. Interesting, too, since the Italian economy was the third largest contributor to 2010 nominal export growth outside of the Euro area.
Rebecca
Rebecca
The number comes from Datastream. It ‘s the quarterly difference from level data. It has been rounded to 0.8 % for the publication.
In fact the 0.95 % number comes from an old times serie that does not take all the countries in its construction. I am not sure that this could lead to an upgrade of Q4 estimates. This is not the same time serie.
Philippe
Hi Philippe,
OK – now we’re talking time series. First I am using the chain-linked 2000 prices in order to calc the estimated contributions (which one can do using the volumes if the share are inputed separately, of course). But I’m not sure that I understand why this data – bookmark to Eurostat download here – is not relevant. It’s the euro area time series, which includes 17 countries currently and EA11-2000, EA12-2006, EA13-2007, EA15-2008 before that. So yes, it takes all of the countries in its construction. Datastream data presumably comes from Eurostat, so I have no idea how it has the revised different base, given that the Eurostat release states explicitly that the base has not been revised.
From the release: “With this flash estimate, euro area and EU GDP figures for earlier quarters are not revised, so the growth rates till the fourth quarter 2010, released on 6 April 2011, remain unchanged.”
Overall, I do acquiesce that the contributions are ‘estimates’ at best until the full revisions come out. I’ll re-post at that time and normalize for the shares – good idea.
BTW: is this you?
Rebecca
I now see the issue – it’s Estonia! The EA changed on Q1 2011 by adding the 17th country, Estonia. This makes the quarterly growth pattern somewhat different over Q4. In any other quarter as of late, this would not have mattered. I’ll repost the chart using the EA17 series only – this makes Germany’s contribution look even more lopsided – 53% of total growth.
Thanks
Yes it’s me
The time series you use is not the good one. It reflects the Euro Area GDP as a geographical entity that grows when a country is added. So the EA11-2000 is the GDP size of the Euroa Area at 11 in 2000. The number of countries is higher at each enlargment of the Euro Area. For time series analysis it is complicated to manage. So in 2011 there is a new country Estonia. The 0.95 % comes from a comparison of EA 17 to EA 16. The difference in size is Estonia. You have to take EA 17 to compare. And with EA 17, the number is 0.83 %.
Philippe
Rebecca
My pleasure because I like very much the way you analyze the economic situation.
I think I will use you graph on the Misery Index.
Philippe
Great! Hopefully I’ll see you here in AB comments again, Rebecca