Euro area economic figures suggest trouble ahead

by Shaun Richards

The last 24 hours or so have brought news of the economic clouds darkening over the Euro area. We can start with La Belle France where it turned out that the past was not what had been claimed.

In Q1 2022, the decline of GDP in volume terms* (-0.2% in Q1, after +0.4% in Q4 2021) was linked to the weakness of household consumption (-1.5% after +0.3%), particularly in transport equipment (-2.3% after -0.9%), other manufactured goods (-2.1% after -0.6%) and in accommodation services and restaurants (-3.9% after -0.9%) ( Insee )

So the economy shrank which was not what we were initially told ( 0%) and President Macron must be grateful that the news was after the elections. His opponent less so. The theme of household consumption being weak feeds into the cost of living crisis and I will return to it later. The other declines are not a surprise to us although the manufacturing one will be one to the Markit PMI series which keeps producing numbers claiming growth. From an hour ago.

The French manufacturing sector is just about
managing to stay in growth territory, but the current
pace of expansion is sluggish amid a multitude of
economic headwinds to the industry.

These numbers are catching up with reality with their rhetoric of “economic headwinds” but they have been around the mid 50s this year suggesting pretty decent growth which does not convince me.

Returning to the official data this was troubling.

final domestic demand excluding inventories contributed negatively to the evolution of GDP, by -0.6 points (after +0.2 points in the previous quarter).

Backed up by this where GDHI is Gross Household Disposable Income .

At the same time, the households’ consumption prices accelerated (+1.3% after +0.8%). As a result, the purchasing power of GDHI fell sharply this quarter (-1.8% after +1.1%). Measured by consumption unit to bring it at an individual level, it fell by 1.9% (after +0.9%).

So domestic demand was lower and with disposable income falling that seems logical. Looking ahead the disposable income situation looks set to get worse because there is no great sign of wages rising but inflation has.

Year on year, the Harmonised Index of Consumer Prices should rise by 5.8%, after +5.4% in April. Over one month, it should increase by 0.7%, after +0.5% in the previous month.

So there is a downwards push coming from the cost of living. Before we move on last year was revised lower too.

Annual growth for 2021 has also been revised by -0.2 points (+6.8% instead of +7.0%) as well as its quarterly profile: revisions of +0.1 points in Q1 2021, -0.5 points in Q2, +0.2 in Q3 and -0.3 in Q4.

This affects the trajectory for this year and numbers produced by the IMF and the like.

 led to a marked revision of the growth rate overhang for 2022: at the end of the first quarter, it now stood at 1.9%, compared with 2.4% in the previous estimate.


I did say that I would return to the issue of domestic consumption and here is this morning’s news of a component of it from the largest Euro area economy.

WIESBADEN – According to provisional results of the Federal Statistical Office (Destatis), the real (price-adjusted) turnover of retail enterprises in Germany was 5.4% and the nominal (not price-adjusted) turnover was 4.7% lower, on a calendar and seasonally adjusted basis, in April 2022 compared with March 2022.

That was quite a sharp fall and as someone who has long argued ( since January 29th 2015 if you wish to look it up) that high inflation reduces retail sales, it is nice to see Germany’s statistical office agreeing with me. The emphasis is mine.

In April 2022, the retail food trade recorded a real drop in sales of 7.7% compared to the previous month. This was the biggest drop in sales compared to the previous month since the start of the time series in 1994. Compared to April 2021, sales fell by 6.5%. This development is probably due to the significant rise in food prices (+8.6% compared to the same month last year)

Looking through the figures the falls seem pretty broad based.

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Trade in textiles, clothing, shoes and leather goods as well as department stores and sales outlets recorded a significant drop of 4.3% and 7.0% respectively .

Whilst the news for the online world was better that suggests that the high street is in bad shape there too.

In April 2022, online and mail-order retailing achieved a sales increase of 5.4% compared to the previous month.

This is an interesting view on the impact ( price elasticity ) of the rises in fuel costs and I am assuming they mean April.

While sales at (independent) petrol stations in March fell compared to the previous month due to the significant rise in fuel prices,


This should not have been a surprise after Monday’s hints from Spain and Germany but some did not seem to update their thoughts after them.

Euro area annual inflation is expected to be 8.1% in May 2022, up from 7.4% in April according to a flash estimate
from Eurostat, the statistical office of the European Union.

That is four times the ECB target of 2% and is broken down below.

Looking at the main components of euro area inflation, energy is expected to have the highest annual rate in May
(39.2%, compared with 37.5% in April), followed by food, alcohol & tobacco (7.5%, compared with 6.3% in April),
non-energy industrial goods (4.2%, compared with 3.8% in April) and services (3.5%, compared with 3.3% in April).

The first point is that every sector saw faster inflation. I think there is even a lesson from the slowest category which is services. You see it has been holding the numbers down and at 41.6% of the index is a substantial brake. However those who have studied the 70s and 80s will know that inflation like this spreads and it has been ticking higher. After all 3.5% would have been considered well over target before this phase.

In an average some will be higher and indeed lower but the 20.1% of Estonia must be causing real pain. Also for a different reason ( it’s lost decade) so must the 10.7% of Greece.


The situation has turned into the stagflation that I have been warning about all year and in the case of France maybe worse as it may be in recession. Of course it may be marginal but this is very different to what the official bodies have been telling us. The Bank of France has kept forecasting growth.

As to the ECB and monetary policy there is this.

The latest all-time high for euro-zone inflation strengthens the case for the ECB to lift interest rates by a half-point in July, Governing Council member Robert Holzmann says ( Bloomberg)

The problem is that it has got its timing all wrong. If you wished to reduce inflation you needed to start last summer when of course they were pushing the view that inflation was transitory. Now at least some of them are pushing for interest-rate rises just as the economy is plainly weakening. Plus bond yields are higher now especially in the place most exposed.

Bloomberg’s bond market liquidity index picks up kinks in the yield curve that signal poor liquidity. Those kinks are worse & worse for Italy as we approach ECB hikes ( Robin Brooks)

The ten-year yield in Italy is 3.1% and whilst this is much lower than the Euro area crisis and the government can pay because much of the debt is reduced in real terms by inflation, workers and consumers are getting no such relief.


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