PARIS – Both PMI survey and European Commission (EC) figures were discouraging in 3Q, as they remain firmly stuck in contraction territory and suggest that the GDP downturn for the eurozone as a whole may even be deeper than that seen in 2Q (-0.2 percent q/q). Nonetheless, these surveys also skewed differently in some areas, with PMI data appearing to indicate that the economic slump has hit bottom, while EC indicators continue to show a marked and ongoing downtrend. Economic performance among countries diverged even more in Q3, with peripheral countries' confidence deteriorating further, while central European countries also suffered a worsening crisis by mid-year. Specifically, the only positive news came from a stabilizing German economy, while both the Spanish and Italian economies may have contracted at a similar pace to that seen in 2Q. As for France, both confidence indicators significantly deteriorated in September, which suggests that economic activity may also have contracted in 3Q after remaining stagnant in the two previous quarters. However, these numbers contrast with the Banque de France's confidence surveys, which show a much more moderate slowdown and point to only slight contraction in Q3. However, it is important to note that September confidence indicators were somewhat better than expected, especially in Italy and Spain, which is in part a reflection of easing financial tensions and receding worries about the sustainability of the countries' government finances in light of the ECB's willingness to purchase government debt and, accordingly, lend its support to the irreversibility of the euro project. While 4Q figures are not yet available, we expect them to be in line with our outlook for mild economic improvement in coming quarters. However, hard data through August show slightly more encouraging outlook Industrial production exceeded forecasts in both July and August, rising by an average of 1pp through August over 2Q, when it shrank by 0.4 percent q/q. Using a 3M moving average to offset volatility, the most recent data indicate that the industrial production slump hit bottom early in the quarter and is now staging a tepid comeback. However, it is still too early to confirm a recovery for industry, particularly when industrial orders, both domestic and export driven, continue to deteriorate and thus do not signal that said recovery will gain rapid traction in the next few months. This more encouraging industrial activity is taking place across the board among member states, though great uncertainty persists about whether the uptick is a temporary trend and may thus evaporate when September numbers are released. In particular, the 1.5 percent m/m rebound in French industrial output in August was largely the result of the volatile transport component, while Italy's rise in industrial activity (1.7 percent m/m) could be due to seasonal factors. In sum, the tepid improvement in industrial production can be amply absorbed by current installed capacity, as EC survey data indicate that capacity utilisation is still clearly below average, suggesting that it would not result in stepped-up investment. Retail sales throughout the euro zone were virtually unchanged from the end of 2Q until August, arresting the decline in the quarter (-0.6 percent q/q) and indicating that household spending may have been more resilient than in the previous quarter. – Agencies
