Eurozone data wrap-up: Path beyond June ECB rate cut remains uncertain

• Eurozone GDP grew by 0.3% q/q in Q1 above our and consensus expectations (0.1% q/q). Upside surprise was widely spread, particularly strong in Spain and Germany.

• Partial expenditure breakdown available reports broad domestic demand improvement mainly in France and Spain. Net trade seems to have been a bigger growth driver in Germany and Italy. ​ 

• Eurozone “flash” headline Harmonised Index of Consumer Prices was stable at 2.4% y/y, while core edged lower to 0.2 percentage points (pp) to 2.7% y/y, slightly less than expected. Nevertheless, services inflation declined to 3.7% y/y, after five months at 4%.

• Today’s data broadly comforts a June rate cut by the ECB.• We flag multiple data to be released that will be key to ascertain rate trajectory. For now, we remain comfortable with our long-held view foreseeing the ECB cutting three times this year.

Eurozone Q1 24 GDP rose by 0.3% q/q above our and consensus expectations. This upside surprise is however partially offset by a 0.1pp downward revision for Q4 23 (to -0.1% q/q) – mainly seen in Germany (-0.2pp to -0.5% q/q) and in Italy (-0.1pp to 0.1% q/q), but confirms the pick-up of business surveys, mainly in the services sector, seen throughout the quarter, showing that the trough in overall activity momentum is behind us. 

Upside surprise came across several countries, most notably Spain and Germany. Among the big four countries, Spain's outperformance continued (+0.7% q/q vs 0.4% q/q expected by us and consensus), followed by Italy (+0.3% q/q vs 0.1% expected by us and consensus), and Germany (we expected -0.1% q/q) and France (we expected +0.1% q/q), both coming at +0.2% q/q. Portugal (+0.7% q/q) and Ireland (+1.1% q/q) also contributed positively to the pick in euro area activity momentum.

Domestic demand on the bounce in France and Spain, more mixed in Germany and Italy. France detailed release show improved domestic momentum supported across consumers (+0.4% q/q after +0.2% q/q) and investment (across non-financial corporations, households and government). At the industry level, services regained strong momentum while manufacturing remains in the doldrums. Likewise, in Spain, household consumption remained well-oriented (+0.3% q/q, UNCH) while investment picked up meaningfully (+2.6% q/q after -1.6% q/q). Meanwhile, in Germany, the national statistical agency reports that Q1 GDP growth was mainly driven by construction investment and exports while household consumption declined. For Italy, the Italian National Institute of Statistic (ISTAT) reports a negative contribution from domestic demand (including inventories, no breakdown available) and a positive one from next exports.

We flag upside risks to our long-held 0.3% 2024 average GDP growth forecast. Carry-over effect – assuming flat quarterly growth in remaining quarters of this year is now 0.3%. Meanwhile, business surveys in the service sectors have shown increased momentum in the past few months, including at the beginning of Q2. Furthermore, while details are scarce, some countries may also be benefitting from the recovery in global trade, more so than expected. We will review our forecast in the next few weeks, but find it worth flagging upside risks to our long held below consensus 0.3% forecasts for now. 

Early Easter unwind and energy inflation broadly offset each other in April. Eurozone headline inflation was stable at 2.4% y/y in April in line with our and consensus expectations. Unsurprisingly, energy prices picked up 1.2pp to -0.6%y/y. Meanwhile food, alcohol and tobacco prices increased 0.2pp to 2.8% y/y. These upside forces were thus offset by drops in both components of core inflation. After five months at 4%, services inflation dropped 3 tenths to 3.7% y/y as base effect plays out from an early Easter (less than our expected 3.4% y/y though), while non-energy industrial goods prices edged further lower by 0.2pp to 0.9% y/y.

Today’s data support ECB’s June rate cut playbook. Eurozone GDP rising by 0.3% q/q performed better than ours, consensus as well as ECB’s March forecast (all at 0.1% q/q – though less so including the downward revision in Q4 23), while eurozone core inflation fell further driven by services inflation down from 4% where it appeared stuck the past five months. As we argued in our last ECB meeting commentary: the hurdle(s) not to cut in June seem high, as also evidenced an already large consensus building within ECB governing council members (including Nagel, Knot for instance). However, for June (and subsequent decisions), key data are yet to be released.

However, today’s print does not tell us much about the rate path beyond June. As per previous ECB communication wage pressures will be key, notably measured by ECB negotiated wage series (data for Q1 should be released between the second and third week of May, our top-down forecast is: 4.3% y/y after 4.5% y/y in Q4 23 down from a peak at 4.7% in Q3 23), as well as ECB’s recently created forward looking negotiated series. Furthermore, these should be read in conjunction with employment growth, which has yielded poor labour productivity growth performance, thus pushing up unit labour costs. Detailed national accounts (for Q1 to be released late May, early June) will also be critical to assess profit margins behaviour. We recall that March ECB staff forecast – that foresee inflation edging down below 2% in H2 25 relied on two key assumptions: an expected (significant) pick-up in labour productivity, and declining profits, absorbing increased labour costs. Also, we will have to wait until May inflation print to be able to fully “clean” from Easter effect – today’s print showed less deceleration than we expected. Furthermore, we flag that improved real activity is mainly coming from the services sector. In turn, it will be key for the ECB to ascertain whether renewed price momentum may not come from this sector, as recovery takes further hold. Pending for all of these, we remain comfortable with our long-held view that the ECB will cut interest rates just three times this year in June, September, and December.