The Eurozone’s Emerging Market Emerges, and Other Fun Q3 GDP Factoids

Eurozone officials should really update this scuplture, as it is six stars short of the 18 current members. Actually, maybe they should just wait until 2015 and bring it to 19 reflecting Lithuania's membership. Photo by Getty Images/Bloomberg.

Preliminary Q3 2014 eurozone GDP hit Friday morning, and the data show the 18-nation bloc grew 0.2% q/q (0.6% annualized), beating analysts' estimates calling for 0.1% q/q growth. This comes a day after US Treasury Secretary Jacob Lew wagged an accusatory finger at European leadership, claiming all that severe austerity they allegedly enforced at Germany's insistence risks a "lost decade." The deflationary depression drumbeat continued even after these better-than-expected growth data, with most claiming growth will prove "insufficient to create jobs," too weak to forestall deflation, too sluggish to reduce debt and, perhaps most interestingly for investors, that core (French and German) weakness will prove too powerful for the rebounding periphery to offset. This last part is something of a sentiment sign-of-the-times worth noting.

First, some fun factoids:

• Germany avoided recession, growing 0.1% q/q (0.3% annualized) after a -0.1% Q2 decline.
• France grew a bit more, 0.3% q/q (1.1% annualized).
• Italy lagged both and was one of two nations contracting (Cyprus), with GDP falling -0.1% q/q.
• This is not a factoid, because Ireland wasn't included in this report, but it is fun: The nation is generally expected to post GDP growth near the top of the eurozone 18.
• These are factoids from the report about other peripheral nations: Spain (+0.5% q/q) and Greece (+0.7% q/q) led growth.

We know what you're saying: "Greece?!?!" Yes, Greece! The eurozone's Emerging Market! In fact, revised data show Greece has grown since Q1, too, its first quarter of positive GDP in about six years, ending a downturn that shaved between 25% and 30% of Greek GDP. That is more than a wee bit off the top.

Look, we aren't banging the drum shouting, "ALL'S WELL IN EUROPE!", but for many months now, folks have fretted the eurozone acting as something of an economic leech, sucking the lifeblood of global growth.^[i] Hence Mr. Lew's comments that Europe was a drag on the world, and the media's near-immediate acceptance of that thesis.

With that said, skepticism about the periphery pulling up the eurozone is warranted. These nations, for the most part, are not big enough to pull Germany and France up. (Not that stocks would require them to grow faster, as this expansion has repeatedly illustrated stocks don't care much about GDP growth rates.)

But the acknowledgement that the periphery is unable to lift the eurozone is a reversal of recent years' dire fears, when the operating presumption was they were plenty big enough to take down not only the eurozone but the world. As recently as a few years ago, folks feared Greece would sink the eurozone. That the tiny Hellenic economy would infect other peripheral economies. And that, in turn, the periphery threatened both the eurozone economy in total and the mere existence of the euro. This was the alleged contagion, the disaster's trigger, its "Lehman moment"-The Fear of 2010, 2011, 2012 and even parts of last year. Heck, one prominent former US official (who has a new book out!) said he was absolutely "apoplectic" over 2010's Greek bailout. (We don't know how he felt about 2012's second Greek bailout, which was more or less a default. Or the other 2012 default. Apoplectic, or some other fancy word for angry, we assume.)

That was the sentiment backdrop then, which an admittedly weak (in recession for 18 months) eurozone had to contend with. It outperformed those dire fears. We would suggest presently sluggish growth is still better than prevailing sentiment, which sees ghosts behind virtually every eurozone economic data point. Disinflation is seen as a looming deflationary spiral^[ii], even when it is mostly a function of energy prices (which, we'd add, are driving disinflation the world over). Slow growth is seen as teetering on the edge of a recession. High unemployment, a long-standing issue in the eurozone, is still high. Folks fret a lost decade a la Japan's^[iii], which is pretty much exactly what folks feared would happen to the US in 2009 and 2010. Early recoveries typically face a high wall of worry. That's the eurozone today, and that's bullish.