Euro-Zone Q1 GDP contracted 2.5% q/q, this was weaker than our forecast and median of -2.0% q/q, but not a total surprise after weaker than expected German and Italian figures earlier this morning. There was no breakdown with the preliminary numbers, but it seems net exports, stocks and especially investment detracted from growth, while government and private consumption performed somewhat better. Incentives for car buyers may have helped consumption at the start of the year. GDP was down 4.6% y/y, after -1.4% y/y in the previous quarter. The later timing of Easter this year compared to 2008 may have led to some distortions, but data highlight the extent of the slowdown, even though there are now signs that Q1 will be as bad as it gets with growth slowly starting to stabilize in coming quarters. Data will back the arguments of the doves at the ECB council, while the hawks start to see through the crisis and focus on the need for appropriate exit strategies. In this situation conflicting messages from individual council members are likely to continue.
Euro-Zone April HICP inflation was confirmed at 0.6% y/y, as expected. Prices rose 0.4% m/m. The breakdown, which was available for the first time showed core inflation accelerating to 1.8% y/y from 1.4% y/y in the previous month. However, the later timing of Easter this year is likely to have impacted the acceleration with prices for package holidays contributing 1.5% points to the annual growth rate. Sharply lower energy prices on the other hand continue to keep the annual rate down. Energy prices were down 8.8% y/y and detracted -0.35% points from the annual growth rate. The headline rate remains far below the ECB’s upper limit for price stability, mainly due to the positive base effects from lower energy prices. This trend will reverse later in the year and for now we agree with the ECB that the risk of wide spread deflation is limited, even though it is clear that the central bank needs to keep a close eye on inflation expectations.