Eurozone
- Solid Q3 growth in Germany and around the Euro Area
German economic growth continued at a high rate in Q3 2017. The Federal Statistical Office (Destatis) reported last week that real quarterly GDP rose by 0.8 % (after 0.9 % in Q2). Positive contributions came from foreign trade, as the increase in exports was higher than that of imports, and from fixed investment. Especially, investment in machinery and equipment increased on the previous year, according to the Destatis release (GDP details are not yet available). In annual terms, GDP rose by 2.8 % and – assuming a rise of 0.6 % q/q in Q4 – it will have expanded by around 2.5 % (swda) over the total of 2017. Germany’s growth acceleration is in line with solid pan-Eurozone results (Figure 1 - see pdf).
In Italy, GDP growth accelerated to 0.5 % quarterly and 1.8 % annually in Q3 (from 0.3 % and 1.5 % previously). Clearly, Italy has been one of the growth laggards across the Euro Area and has now reached the highest annual expansion since Q1 2011. In spite of upcoming elections in the first half of next year and the usual uncertainty around Italian politics, economic sentiment has reached a multi-year high (Figure 2 - see pdf).
Eurostat confirmed Q3 GDP growth at 0.6 % (q/q) and 2.5 % (y/y) for the total of the Eurozone. Our GDP tracking estimate (as of 3rd November), that is based on a dynamic factor model, signals a 0.6 % quarterly GDP increase for the final quarter, thereby taking annual 2017 growth to 2.3 % (after 1.8 % in 2016). The model is updated on a bi-monthly basis (Figure 3 - see pdf).
CEE
- Economic growth in the CEE region further accelerates
- Romania stands out with 8.6 % (y/y) GDP growth in Q3 followed by the Czech Republic and Poland.
- The medium-term growth pattern suggests growth to be driven by domestic demand.
Strong growth in the CEE region continues! GDP figures for Q3 2017, which have been released early last week, show average economic growth of 3.8 % across the region *). Economic growth ranges between 8.6 % (y/y, sa) in Romania to 1.8 % (y/y, nsa) in Russia. Besides, exceptionally high growth in Romania, GDP growth also accelerated in the Czech Republic (5.0 %, y/y, sa) and Poland (4.7 %, y/y, nsa) as figure 4 shows. With 2.5 % (y/y, sa) growth in the Euro Area, the CEE region continues its catch-up.
It is too early to tell with certainty which factors drove GDP in Q3. However, the preceding quarters point towards prolonged support from domestic demand, particularly from household consumption. During the first two quarters of the year household consumption contributed substantially to GDP growth in Romania (4.6 %), Poland (3.9 %) and Bulgaria (2.7 %, y/y contribution). Its impact on GDP growth was slightly lower in Hungary (2 %), Slovakia (1.8 %) and the Czech Republic (1.7 %), nevertheless, being of economic significance. In Austria, which is among the fastest growing Euro Area economies, household consumption contributed by 0.7 %-points to GDP growth (Figure 5 - see pdf).
Investment (gross fixed capital formation) shows a much more diversified picture. Hungary had a strong rebound in investment growth at an average of 21 % during the first two quarters of 2017 contributing 3.9 %-points to economic growth **). The only other CEE economy with a substantial growth contribution from investment is the Czech Republic where investment picked up during the second quarter reaching 7.9 % (y/y). As investment growth was negative during 2016 in all the economies which are shown in figure 5, a rebound in investment is an additional potential source of growth acceleration during the third quarter.
For Romania, which was the biggest surprise with GDP growth of 8.6 % (y/y, sa) in Q3, high frequency indicators support domestic demand as a driver. Retail sales expanded by 11.8 % (y/y) in Q3 after 7.3 % in Q1 and Q2. This is accompanied by extensive nominal wage growth of 14.8 % (y/y) during the third quarter. The average inflation rate between July and September was 1.4 %. Thus, wage growth implies a considerable improvement of the purchasing power of Romanian households. Retail sales were high in Q3, though more in line with the first half of the year, in Poland (7.8 %), Slovakia (6.2 %), Hungary (5.0 %), the Czech Republic (3.3 %) and Bulgaria (2.6 %). Other high frequency indicators, show evidence for increased investment activity. Construction activity accelerated in Poland with y/y growth of 19.3 % in Q3 after 9.7 % in Q2 and 1.3 % in Q1 (Figure 6 -. see pdf). Moreover, investment in construction picked up in Slovakia at 7.1 % in Q3 after 0.4 % in Q2 and -5.8 % in Q1. Construction activity sustained its high growth rate in Hungary (Q3: 27.1 %). Interestingly, in Romania construction declined at 8 %, indicating the importance of consumption as a driver of growth.
Economic growth in the CEE region is mainly driven by domestic factors. However, the acceleration of economic growth in the Euro Area should support growth in the region over the medium-term. We should, therefore, see a continuation of convergence of the region.
Disclaimer
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*) The simple arithmetic average includes growth rates for Poland, the Czech Republic, Slovakia, Hungary, Ukraine, Romania, Russia, Bulgaria und Serbia.
**) During the whole year of 2016 investment declined by 10.6 % in Hungary.