Europe’s recession eats into the core

As the PMIs have been pointing to since the beginning of the year the Eurozone fell back into recession overnight with Eurostat reporting estimated Q3 GDP down 0.1% following a Q2 contraction of 0.2%:

The numbers from individual countries were mixed with France providing a small upside surprise with 0.2% QoQ growth but the Netherlands had a shocker with -1.1% after a previous -0.7%. Germany is still managing small amounts of growth at 0.2% QoQ, but the growth rate is slowing and Italy, Spain and Portugal again contracted, but at a slower pace than in Q2.

Overall the number weren’t as terrible as they could have been, not that they still weren’t bad,  but the question now is do they point to a bottoming out of growth and the beginnings of a recovery in 2013? That is certainly what Olli Rehn, the European Commissioner, would like us to believe , but I feel that is far too optimistic as it ignores the latest round of forward looking data.

The ECB’s latest banking survey  noted a continuing and significant deterioration in credit demand across the EZ:

  • A pronounced decline in demand for loans to enterprises, deteriorating further from Q2
  • M&A, inventories and working capital seen as the major reasons for lack of enterprise demand
  • Continuing net decline in demand for loans to households for house purchases accelerated in Q3 from Q2
  • Continuing net decline in consumer credit, although rate of decline slowed
  • Future expectations are for continuing decline in demand for credit from both enterprises and households, although at slower rate

And the latest PMI data points to a similar trend of lower aggregate demand moving into Q4:

The Eurozone has slid further into decline at the start of the fourth quarter. The survey is running at a level which is historically consistent with the region’s economy contracting at a quarterly rate of over 0.5%. Official data have shown surprising resilience over the summer compared to the survey data, but the underlying business climate has clearly deteriorated markedly in recent months. While GDP may decline only modestly in the third quarter, a steeper fall looks to be on the cards for the fourth quarter.

Those reports lead me to believe that the slowing of the rate of contraction in the periphery in Q3 was probably temporary and, due to the continuation of fiscal tightening in many countries, Q4 is likely to show an acceleration of the downtrend. Obviously we’ll have to wait for further data, and there is a possibility that recent modest recovery in China and the US will provide some uplift in early 2013, but at this stage the forward order component of the PMIs is still deteriorating.

As well, as I said above , the Netherlands is looking to be struggling which presents some relatively serious problems as I mentioned this back in September:

The Dutch economy is relatively strong but domestic consumption has been slowing over the last few years and there is a real risk that the European crisis has the potential to slow the economy further. One of the major points of concern is the housing market which, like Australia, is backed by large private sector debt. Dutch housing had deflated 15% since 2008 but the downtrend appears to have picked up pace in recent months.


The Unconventional Economist has also posted on the failed Dutch housing policy and how, much like Australia, this has created significant macro-economic risks for the country:

Due in part to the Netherlands’ generous mortgage tax relief, which allows home owners to deduct from tax all interest payments for a maximum period of 30 years, Netherlands’ mortgage debt is among the world’s highest, amounting to 110% GDP currently according to the Dutch central bank.


The Netherlands has seen a recent uptick in unemployment to 6.8%, although by European standards that is still low, but household spending has been in decline for 18 months now and fell a further 1.8% in Q3.  That all suggests to me, on top of the obvious flow-on effects from the Eurozone crisis, that the Dutch economy is starting to show some balance sheet recession dynamics. It must also be remembered that The Netherlands is one of the AAA club that lends its high rating to Eurozone financial instruments such as the ESM. A further deterioration in the economy, on top of other ‘core’ country weakness, is likely to have flow-on consequences to supra-European instrument ratings.

Yet another country to continue to watch closely.

Eurostat Q3 GDP Estimates

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  1. Thanks DE, most certainly a shocker and once again labelled “surprising”.

    A lot of it is due to consumers and business anticipating government cutbacks. As you know The Netherlands had elections a couple of months ago and people knew that the following coalition talks would result in some painful measures.

    Well, after 47 days the talks resulted in a “Coalition Agreement” which actually sparked an almost historic political debate regarding a proposed change in how healthcare would be funded, resulting in an early adjustment of the Agreement.
    Unfortunately I’m really busy at the moment, but maybe I can provide an update at some point. For those interested:

    One of the expected results is reform of Dutch housing policy by decreasing mortgage interest tax deductibility (still very much a token policy only) and relaxing price controls on the rental market. More importantly, there will be a dedicated Minister for Housing Reform which means more can be expected.

    I think this 1.1% decrease is partially due to people sitting on the sideline to see how they would be affected. Unfortunately they will be affected more than expected so I can see them sitting on the sideline for quite a bit longer.