Today Eurostat released (pdf) the second estimate of Q4 2011 Gross Domestic Product. Real euro area (EA) GDP declined 0.3% over the quarter (-1.3% on an annualized basis). In this release Eurostat provides a breakdown across region, spending categories, and industry, and is much more detailed than the preliminary flash estimate. It’s not pretty.
The expenditure side was very weak. Household and government consumption declined 0.4% and 0.2%, respectively, while gross capital formation tumbled 0.7%. Inventory depletion accounted for much of the reduction in investment and fixed investment deteriorated to a lesser degree. Exports fell 0.4%, while imports dropped a full 1.2%; therefore, net exports contributed +0.3% to overall GDP growth. The only positive contribution to GDP growth was imports – this type of technical growth is not sustainable.
As the chart below illustrates, exports has been a major driver of growth during this recovery. However, export demand is dropping off at the margin, and more weakness is expected. The level of new export orders (a component of the Markit PMI) fell for eight consecutive months through February.
(Click charts to expand)
So it’s up to domestic demand to spur further recovery. I also have my doubts there, given that fiscal austerity pushed the unemployment rate to a historical high of 10.7% in January (rather vertically, I might add).
A second part of the EA GDP report was the disturbing minority of countries that posted positive growth: just three out of 13. French growth clearly added balance to the average, given its large weight in the index. However, there are plenty of things that can go wrong there with higher energy costs, the rising unemployment rate, and minimal business confidence.
Going forward, it’s either up or down again for the EA. With the tight fiscal and now tightening monetary policy, the economy surely faces a lot of headwinds – down again would be my bet.