Morgan Stanley: Bullish, but not revising estimates for Euroland
Elga Bartsch writes that Morgan Stanley looks at the recent data coming out of Eurloand as distinctly bullish. As a result, they are revising up their GDP estimates.
A number of countries, notably the euro area’s two largest economies – Germany and France – posted a surprise rise in 2Q GDP. Others – like Italy, Spain and the Benelux countries – still saw a marked decline in activity in April-June. For the euro area as a whole, at a non-annualised -0.1%Q, 2Q GDP also came in ahead of expectations. Hence, the economy is stabilising after having been in free-fall over the winter. A number of special factors have flattered 2Q GDP, notably consumer spending that was boosted by car-scrapping schemes and construction activity that recovered after an unusually cold winter and benefited from government sponsored infrastructure spending. The outlook for the current quarter remains benign and there is potentially scope for near-term upside surprises. But at the same time there is little in the 2Q GDP reports and the current macro economic environment that would cause us to revise the euro area outlook significantly.
Incorporating the 2Q GDP releases and, in some cases, revisions to past data, into our full-year estimates causes us to raise our forecasts slightly. The full-year contraction in euro area GDP this year now stands at -4%, a relatively small revision compared with the previous estimate of -4.4%. The small upgrade to the euro area estimates masks larger upgrades for Germany and France and downgrades for Italy, Belgium and the Netherlands. Our Spanish forecast stays broadly unchanged for 2009. As we left the outlook for 2H09 virtually unchanged, our 2010 full-year estimate only changes marginally from 0.5% to 0.6%. These forecast changes do not constitute a material change in view. In fact, we reiterate our long-standing call for a tepid, below-trend recovery in the euro area. We acknowledge the risk that this profile might turn out to be more bumpy than the one we currently envisage.
Bartsch goes on to write that several factors will impede a revival in Euroland growth, mainly weak consumer spending underneath the stimulus of the car scrappage schemes, which are merely pulling forward demand. Low income growth due to high levels of unemployment are a large factor here. Moreover, business investment may be weak as well.
One bullish factor for Europe is the inventory destocking in Q2 is likely to turn the other way in Q3 and beyond just as it is likely to do in the US. This means that Q3 numbers in Euroland will be flattered by a net contribution from the inventory cycle (less inventory purging or outright restocking).
On the whole, it is striking that so much bullish data is coming out of Europe when it seemed that the US was poised to exit recession sooner. I admit to also having seen Europe as a laggard. But the German PMI data and French manufacturing data released today reveal a broader rebound, not just in manufacturing but also in services, where the recovery in the US has been weak.