Normally, the final revision to GDP numbers isn’t a thing to move the markets. But that could be different this time around for the EuroZone after what happened with Germany. Especially for the Euro now that we’re moving into the ECB’s pre-rate decision holding period. There is plenty of anticipation for how the shared central bank responds to the latest data, and that could move the market as well.
What happened with the GDP numbers?
The reason we can be certain that there will be a revision to the Eurozone GDP figures is because earlier this month, Germany revised their GDP results. As the largest economy in Europe, it necessarily will have an impact on the final reading for the shared economy.
Germany’s revision was a bit of a shock, because it caused the country to fall into a technical recession. Q4 of last year was negative, and with the first quarter being negative after revision, then it implies a recession. That’s not the case for the Eurozone, because Q4 was flat. So, a revision to negative won’t imply Europe is in a recession. But flat growth followed by negative growth would be something of a bad sign.
Not too much of a surprise
We have to remember that Europe was expected to have a tough winter because of the war in Ukraine’s impact on prices and supply chains. Particularly energy and food costs were much higher, but also there were restrictions on industrial raw materials, such as coal and steel. Germany used to import a lot of that from Russia, and from parts of Ukraine now either in conflict or under Russian control.
The initial report of avoiding a recession in Germany was a positive surprise. The revision lower to a recession simply confirmed what was originally expected. And the same could happen with the Eurozone figures.
The ECB question
Investors are pretty much agreed that they expect the ECB to hike at the next meeting. After that, however, there is a significant amount of uncertainty. If Q1 GDP is revised down just two decimal points, it will fall into negative. And aggressively pushing for more rate hikes might be more difficult on the back of one quarter of negative growth. The real threat of an immediate technical recession might incline the scales in favor of a rate hike pause in the July meeting. Particularly if the Fed pauses now, and there isn’t much indication that the Fed might “make up” for the pause by doing a double hike in July.
Eurozone Q1 GDP growth is expected to be revised down to flat from 0.1% initially reported, and compared to flat in the prior quarter. Annual GDP growth is forecast to be revised down to 1.2% from 1.3% growth in the preliminary reading, and compared to 1.8% growth in 2022.
A relatively small miss of expectations could have a larger psychological impact. On the other hand, if the revision isn’t as large as expected, it could help reassure markets that Germany’s situation is somewhat unique. But the long-term impact on the Euro will likely rely more on expectations for the ECB.
