(monthly data)
-3 -2 -1 0 1 2 3 4
-30 -20 -10 0 10 20 30 40
2004 2005 2006 2007 2008 2009 2010 total retail sales 1) (left-hand scale)
consumer confidence 2) (right-hand scale) retail confidence 2) (right-hand scale)
Sources: European Commission Business and Consumer Surveys and Eurostat.
Notes: From May 2010 onwards, EC business survey data refer to the NACE Rev. 2 Classifi cation.
1) Annual percentage changes; three-month moving averages;
working day-adjusted. Excludes fuel.
2) Percentage balances; seasonally and mean-adjusted.
Output, demand and the labour market
in some countries. However, these incentives mostly boosted purchases of relatively small cars, while current car purchases seem to be more concentrated in the high-value car segment.
As a result, the number of new passenger car registrations might currently underestimate the impact of car purchases on real consumer spending.
Further fi scal measures impacting on consumption are the value added tax increases that had been announced for the third quarter of 2010 in some Member States. These increases should have had an upward impact on consumption growth in the second quarter of 2010 as a result of advanced purchases, while they are expected to have an adverse impact as of the third quarter.
INVESTMENT
Gross capital formation contracted for eight consecutive quarters in the euro area, from the second quarter of 2008 to the fi rst quarter of 2010. Weak demand, low capacity utilisation, tight lending standards and low business confi dence all dampened investment over the recession period. As the strength of the factors dampening investment has progressively waned, the outlook has become somewhat brighter and, in the second quarter of this year, investment increased on a quarterly basis.
Nonetheless, the strong growth in the second quarter – 1.8% quarter on quarter compared with a decline of 0.4% in the previous quarter – also appears to have been affected by temporary factors, in particular weather conditions, which implied that construction investment was postponed from the fi rst quarter.
The breakdown of investment in the second quarter of 2010 has not yet been published. On the basis of the available information, however, it is likely that the increase in investment stemmed mainly from a brisk rebound in construction investment. Looking through the weather-related volatility, construction investment should, however, remain subdued, owing to housing market adjustments in a number of euro area countries following the declines in residential property prices. Indeed, the European Commission survey and the Purchasing Managers’ Index (PMI) suggest that activity in the construction sector will remain subdued, albeit not as weak as in the past.
Non-construction investment, which mainly consists of assets employed in the production of goods and services, is also likely to have increased in the second quarter of 2010 for the fi rst time since the beginning of 2008. Low capacity utilisation, negative earnings growth and tight lending standards all had an adverse affect on investment during the crisis, bringing about very strong declines at the end of 2008 and the beginning of 2009. Since the middle of 2009, however, the contraction in non-construction investment has been much milder, driven by the strengthening in overall economic activity and less stringent fi nancing conditions. However, continued restructuring of balance sheets in some sectors is likely to continue to have a dampening effect on investment. The quarter-on-quarter growth rate of industrial production of capital goods, an indicator of future non-construction investment, accelerated in the second quarter of 2010, compared with the fi rst quarter. Manufacturing confi dence increased in the second quarter of 2010 and continued to provide positive signals in July and August. Capacity utilisation increased in July, compared with April, according to the European Commission’s survey. Limits to production stemming from demand-side factors declined over that period, while supply-side constraints, such as a lack of equipment or space and the shortage of labour, rose somewhat. However, according to the July bank lending survey, credit standards have tightened somewhat in the second quarter of 2010 in a number of countries (see the box entitled “The results of the July 2010 bank lending survey for the euro area” in the August 2010 issue of the Monthly Bulletin). Overall, non-construction investment is expected to progressively strengthen over the rest of the year, but showing only moderate growth, owing to still subdued prospects for domestic demand, as well as to fi nancing constraints, overall uncertainty and still high spare capacity.
Summing up, aggregate investment is expected to grow at lower rates in the third quarter than in the second quarter. In addition to the reversal of the weather-related effect on construction investment, some fi scal measures that sustained investment in the past are being withdrawn in the third quarter and should have a downward impact on the quarterly growth of total investment.
GOVERNMENT CONSUMPTION
Government consumption has supported economic activity during the economic downturn, as several government consumption expenditure items have been relatively unaffected by cyclical developments, and, to a lesser extent, because euro area governments adopted measures to sustain demand. Government consumption quarterly growth rose to 0.5% in the second quarter of 2010, from 0.2% in the fi rst quarter. However, the impetus to domestic demand from government consumption is expected to be moderate in the remainder of 2010 and beyond, refl ecting expected fi scal consolidation efforts in a number of euro area countries.
INVENTORIES
As the recession hit the euro area, fi rms responded by reducing inventories sharply. As demand has gradually recovered, the pace of inventory de-stocking has slowed, thus contributing positively to GDP growth since the third quarter of 2009. The accumulated contribution over these quarters, estimated at 1.5 percentage point, corresponds broadly to the accumulated negative contribution during the fi rst half of 2009. These developments have more or less mirrored the sharp downturn in GDP growth, which is now being followed by a cyclical recovery. In line with this recovery, alongside expectations of increasing demand, changes in inventories accounted for a sizeable 0.8 percentage point of GDP growth in the fi rst quarter of 2010, compared with 0.2 percentage point in the second quarter.
Looking ahead, anecdotal evidence and surveys suggest that inventories will be kept at relatively low levels, suggesting neutral contributions to euro area GDP growth in the quarters ahead. There is, however, some statistical uncertainty linked to the way inventories are estimated.
TRADE
Following a sharp contraction around the end of 2008 and the beginning of 2009, and a further, albeit more moderate, decline in the second quarter of 2009, both imports and exports have increased, on a quarterly basis, since the middle of 2009. This rebound has been broadly based across all major product categories. In particular, imports and exports of intermediate goods, which were the main driver of the previous decline in trade fl ows, showed remarkable increases.
Euro area trade continued to grow at an accelerated pace in the fi rst and the second quarter of 2010, driven by the recovery in the global economy and the increase in economic activity in the euro area.
Imports and exports both grew by 4.4% in the second quarter of the year. As exports account for a slightly larger share of GDP than imports, net trade provided a positive contribution to GDP growth in the second quarter of 2010, of 0.1 percentage point, whereas it had contributed negatively in the previous quarter, by -0.6 percentage point.
Looking ahead, the growth of the global economy – and of the emerging markets in particular – is expected to remain strong, though somewhat less buoyant than in the fi rst half of the year. Further increases in demand for euro area products are expected, which should also benefi t from the recent depreciation of the euro. By contrast, given that the euro area recovery is expected to moderate and be less dynamic than the upturn in global economic activity, import growth may prove slightly more
Output, demand and the labour market
sluggish than export growth. As a consequence, net trade is likely to provide positive contributions to euro area GDP growth in the coming quarters.
4.2 OUTPUT, SUPPLY AND LABOUR MARKET DEVELOPMENTS
From a value added perspective, the euro area recovery has been largely driven by the industrial sector.
The services sector recorded moderate growth up to the end of 2009, accelerating in 2010, while the construction sector continued to contract until the fi rst quarter of 2010. Total value added increased by 0.8% in the second quarter of 2010, compared with a growth rate of 0.6% in the previous quarter. The difference between the quarterly growth rates of GDP and value added is due to the inclusion in the former of taxes less subsidies on products, which increased by 2.5% quarter on quarter in the second quarter of 2010. Notwithstanding the recent increases, more than half of the losses in value added from the recession do, however, persist, as value added has increased by only 1.8% since the trough in activity in the second quarter of 2009. Survey data suggest a further increase in value added in the third quarter of 2010, though at lower rates than in the previous quarter.
Labour market conditions have stabilised in the euro area (see the labour market section below).
Employment remained stable in the fi rst quarter of 2010, while the unemployment rate was unchanged at 10.0% from March to July 2010.
SECTORAL OUTPUT
Value added in industry (excluding construction), which has been the major driver of the increase in total value added since the third quarter of 2009, grew by 1.9% in the second quarter of 2010, following an increase of 2.3% in the fi rst quarter. These developments are broadly in line with data on industrial production. Looking at the main industrial sectors, production increased, in particular in the intermediate and capital goods industries. These sectoral differences are normal in the early stage of a recovery, when more robust growth is normally seen in the intermediate goods sector, partly related to the recovery in exports.
Looking ahead, the upward trend in industrial new orders signals a broad-based expansion in industrial activity, as orders received can be expected to subsequently appear in production. This indicator rose signifi cantly more in the second quarter of 2010 than in the previous quarter, in particular owing to the capital goods sector. Moreover, timely data, in the form of business surveys, suggest that growth in the industrial sector remained positive at the beginning of the third quarter of 2010 (see Chart 50). The PMI output index for the euro area manufacturing sector declined slightly in August, now standing below the level of the second quarter, but still indicating positive growth rates. Still in August, confi dence in the manufacturing sector remained stable after increasing in July, according to the European Commission business survey.
Activity in the construction sector increased in the second quarter of 2010 for the fi rst time since the fi rst quarter of 2008, owing to the reversal of the decline in the fi rst quarter, which was related to the adverse weather that affected many euro area countries in the winter months. Value added in the construction sector rose by 0.5% in the second quarter and now stands around 11% below the level observed in the fi rst quarter of 2008, before the start of the economic downturn. Looking through the recent volatility, construction activity is still subdued overall, owing to housing market adjustments in a number of euro area countries after the declines in residential property prices. Regarding surveys, the European Commission survey and the PMI suggest that activity in the construction sector may remain weak beyond the second quarter, though improving from the very negative developments observed before.
Activity in the services sector is much less sensitive to cyclical developments than manufacturing and construction activity. Services sector value added posted an increase of 0.6% in the second quarter of 2010, accelerating from 0.3% in the fi rst quarter of 2010.
Value added in the services sector has thereby almost offset the decline observed during the recession.
Available information on the main services sub-sectors shows that, following the sharp falls around the end of 2008 and the beginning of 2009, value added has grown in all three sub-sectors. Looking ahead, recently published survey data suggest that the services sector recorded further growth at the beginning of the third quarter of 2010, though probably at somewhat lower rates than in the second quarter.
LABOUR MARKET
Improvements in euro area labour market conditions have lagged behind the recovery in economic activity, with employment falling on a quarterly basis to the fourth quarter of 2009 and stabilising only in the fi rst quarter of 2010, as changes in employment often lag behind business cycle fl uctuations. Overall, euro area employment has been relatively resilient throughout the economic downturn, considering the sharp drop recorded in economic activity. This is partly due to the fact that, in many euro area countries, special working time schemes supported employment, as the economic downturn intensifi ed. A large part of the adjustment in employment has actually taken place through a reduction in hours worked per person employed rather than through large increases in unemployment. However, labour market developments have differed considerably across euro area economies. Overall, employment in industry (excluding construction) and in
Chart 49 Industrial production growth