Eurozone: Five-year high GDP growth, but still not great
Preliminary GDP data indicate growth of +0.3% q/q in Q4 2015, bringing full-year expansion to +1.5%, which is the highest since 2011 and in line with expectations. The main growth driver was increased household consumption. Germany’s 2015 GDP increased by +1.4%, reflecting domestic demand growth, particularly government spending related to the refugee crisis. France’s household consumption maintained its growth at +0.2% q/q in Q4, putting 2015 expansion at +1.1%. Household consumption was also an important contributor to growth in Italy. All Eurozone countries expanded more strongly in 2015 than in 2014, with Spain (+3.2% in 2015) registering the highest rate after Ireland. We expect domestic demand will continue to drive growth, reflecting cheap oil prices and a pick-up in corporate investment. The effects of a weak EUR, already evident in export growth in some countries such as Italy, will also continue to boost economic activity, although to a lesser extent than in 2015. Overall, we expect slightly stronger growth in 2016, at +1.7%, with higher growth at a country level ranging from +1.8% in Germany to +1.4% and +1.1% in France and Italy, respectively. In contrast, growth in Spain is likely to slow moderately, to +2.7%.
Commodities: Oil platform
It is too early to suggest that the recent agreement by some oil-producing countries to freeze output at January levels will address the current oversupply of crude. The accord involves Saudi Arabia (January output 10.2mbpd), Russia (10.9mbpd), Venezuela (2.4mbpd) and Qatar (0.7mbpd). However, the agreement is tentative and dependent on other producers joining the quartet. This may be difficult to achieve as the U.S. is unlikely to agree and the timing is bad for both Iran (increasing output after gaining sanctions relief) and Iraq (requiring oil revenues to finance security against ongoing security threats). Both Russia and Saudi Arabia have been pumping at, or near, record levels for two years, so a production freeze - rather than a cut - does little to balance the market. An additional factor that may yet derail the agreement is that the two principal actors support opposing sides in the conflict in Syria. This agreement may yet lead to other concerted action to balance the oil market but we do not see it as having a marked effect on prices (Brent currently <USD35/b) in the short term.
Norway: Negative impact from oil prices
GDP in Q4 2015 – excluding oil activity – expanded only slightly (+0.1% q/q) after a stagnant Q3. While domestic consumption increased by +0.6% q/q in Q4, compared with +0.3% in the previous quarter, investment continued to decline, for the third consecutive quarter. Investment was affected by weakness in the oil sector but also by contraction in manufacturing (-1.3% q/q) and general government investment (-2.7%). GDP including oil activities declined by -1.2% q/q in Q4, reflecting the impact of lower oil prices and declining output of the petroleum industries (-5.8% q/q). Mainland GDP growth (excluding oil) was +1.1% in 2015, the weakest annual rate since 2009, and overall growth was +1.7%. To counter the negative consequences of lower oil prices, the government adopted a supportive 2016 budget, which projects a boost equivalent to +0.7% of mainland GDP. Meanwhile, the Central Bank is likely to announce further rate cuts in H1 2016. We expect this year’s overall GDP growth will slow further, to +1.2%, as a result of investment contraction and a slowdown in export growth.
On an annualised basis, GDP increased by +3.3% q/q in Q4 2015, following +2.5% (revised upwards) and +0.4% in Q3 and Q2, respectively. It was the strongest quarterly GDP growth since Q4 2014 and was driven by private consumption (+5.8%, after +2.2% in Q3) and investment (+6.8% from -0.1%) but net exports had a negative impact as import growth was +25% while exports increased by +7.6%. For the year as a whole, GDP increased by +2.6%, compared with an earlier official forecast of +2.3%. The economy is showing some resilience despite regional (Middle East turmoil) and global headwinds but, in relation to the latter, weak recoveries in Europe (markets for over 30% of Israeli exports) and uncertainties relating to U.S. (28%) and Chinese growth weigh against external demand for Israeli products and services. Exports were a primary growth driver pre-2012 but private consumption is likely to remain the strongest boost to GDP this year and next. EH expects GDP growth of +3% in 2016.