Eurozone economic activity weakens moving into Q2

Industrial production and goods consumption contracting

Eurozone industrial production (excluding construction) contracted by 4.1% mom in March, following 1.5% growth in February. As a result of the contraction in March, the quarterly change in production was -0.2% qoq in Q1. Besides industrial production, goods consumption (weighted average of retail sales and new car registrations) also contracted in Q1 (-0.6% qoq). Since the first estimate of Q1 GDP has already been published and showed expansion of 0.1% qoq it seems that the impact of the construction and services sectors combined was positive. Indeed, monthly data for construction activity (+1.3% 3Mo3M in February), show robust growth, which probably was partly related to the mild winter weather. Looking at activity in the services sector, the segment arts, entertainment and recreation was the only part where output still was clearly below its pre-pandemic level in 2022Q4, implying that there could have been some extra growth due to catching up effects in Q1. The rest of the services sector had already rebounded to well above the pre-pandemic levels by the start of 2022. Moreover, within the services sector, the parts that seem most sensitive to interest rate hikes and the parts that are related to goods consumption and global trade (financial services and insurance, wholesale, retail and transportation) already lost momentum in the second half of 2022 and contracted in 2022Q4.

Looking beyond Q1, the sharp contraction in industrial production (-4.1% mom), retail sales (-1.2% mom) and new car registrations (-0.9% mom) in March means that there is a sizeable negative statistical overlap moving into Q2, of around -1.2% qoq based on these parts of GDP. As we do not expect sharp accelerations in services production or construction activity, it seems that a decline in GDP in Q2 is on the cards. Although the current level of the services PMI (56.2 in April) would suggest strong growth in the sector, the PMI has been out of sync with actual activity in services since the middle of last year (total services activity expanded by 0.8% qoq in Q3 and 0.4% in Q4, whereas the PMI was well below 50 during those quarters). All told, a contraction in GDP in Q2 would be in line with our base scenario of the economy contracting modestly during the rest of the this year, with domestic demand being hit by past and upcoming interest rate hikes by the ECB and a slowdown in global growth limiting eurozone exports.