The “soft core” of the Eurozone was on full display in the second quarter of the year, as Germany, France and Italy all failed to grow. Germany shrank by 0.2% quarter-on-quarter; Italy slipped into recession for the third time since 2008; and France faced a second consecutive quarter of zero growth.
We expect that Germany will recover its form in Q3, as the Q2 contraction was partly driven by temporary factors: a strong Q1 and an escalation of the Ukraine/Russia stand off, while German fundamentals remain relatively strong. We’re less optimistic about the other core countries.
Meanwhile peripheral economies like Spain and Portugal rebounded. Spanish output grew by 0.6% quarter-on-quarter, which is the fastest rate in more than five years. The effect of stronger growth can already be seen in Spain’s unemployment rate, which has been on a downward path since the end of 2013 (see Figure 2). We expect a similarly strong performance to continue into Q3 for most peripheral economies on the back of a robust tourism season.
Based on this analysis, we have revised down our Eurozone main scenario projection from 1.1% to 0.8% for 2014 to reflect the weakness of the three core countries.