Germany, Italy and France: Economic Epiphany?

The euro-area slowed in 3Q, with growth dipping to 0.2 percent, below the economy's trend rate of growth. Part of the weakness is temporary, but underlying momentum appears to have receded. A persistent slowdown to 0.2 percent a quarter would be a major source of concern to the European Central Bank and could prompt a delay to higher interest rates.

In addition to, three major economies of the Euro Area have published their economic data – Germany, Italy and France.

Germany

The recent German unemployment rate dropped to another record low. Trade tensions, emerging market crisis, slowing economic growth, or Brexit, the German labour market continues to defy all possible headwinds. Undeniably, labour markets always react with a delay to economic developments but the numbers remain impressive. The number of unemployed dropped to 2.2 million people.

At the same time, there is finally some evidence that the Phillips curve might not be entirely dead in Germany. The tight labour market has gradually pushed up nominal wages, even though there is clearly room for more. The pass-through of higher wages into higher prices, however, is still hard to find. This is at least what the just-released first estimate for October inflation is suggesting. Based on the results of seven states, headline inflation came in at 2.5 percent YoY in October, from 2.3 percent YoY in September leading headline inflation to reach a ten-year high. This is mainly driven by higher oil prices and the vacation-driven effect of higher prices for hotels and packaged holiday trips.

Italy

Italy's national statistics agency (Istat) released Italian 3Q18 GDP data which turned out weaker than expected. Seasonally adjusted GDP was flat quarter on quarter while expanding by 0.8 percent in annual terms.

With external headwinds likely to continue to weigh on net exports, the burden of growth looks set to remain on domestic demand.

Istat indicated that domestic demand and net exports were both growth neutral. Given the deteriorating international demand backdrop, it was expected that net exports deduct from quarterly growth, but softer domestic demand kept a lid on imports as well.

Istat also released the first set of confidence data for October, which provided a mixed picture, as it often has lately.

On the one hand, consumer confidence edged up to 116.6. More worryingly, the composite business confidence fell for the third time in a row, reaching 103.6 – the lowest level since September 2016. The latter reflected declines in the manufacturing, services, and retail components, with construction alone posting again. The manufacturing sub-components show a further softening in orders and expected production, not a good sign for industrial production developments over 4Q18.

France

After two weak quarters of growth induced by strikes in the service sector and weaker consumer confidence, once again France reported a quarter of weak growth which was troubled by the negative impact of destocking. However, there was a rebound in domestic demand, which grew by 0.5 percent QoQ, the fastest pace since 3Q17 while the weak euro helped net exports, which contributed 0.2 percent to growth.

Private consumption rebounded by 0.5 percent QoQ. Business investment still benefited from healthy order books in 3Q18, which together with some fiscal support, led to 1.4 percent QoQ growth. Public investments came in much weaker than expected, at 0.2 percent QoQ.

Household investments actually posted their first decline since 2015 at -0.2 percent. This is even more surprising as interest rates remain extremely low and price increases on the housing market remain soft.

Exports grew by 0.7 percent in 3Q18, still benefiting from solid foreign order books. Private consumption was not strong enough to really boost imports, which allowed net exports to contribute a healthy 0.2 percent to GDP growth in the third quarter. The euro weakness should help French exporters in 2018, which is likely to see the strongest net export contribution since 2012, at 0.5 percent.

End Point

Considering the figures we have seen in these main economies as well as the overall crumbling and more uncertain growth prospects, new political developments, and very little underlying inflationary pressure in the Euro Area, the ECB will be happy that December is not too far away and that it can bring net QE purchases to an end. However, against the background of recent developments, next year's discussions on the timing of the first rate hike will be fervid.