WOOD Flash – Eurozone macro: tweaking the GDP outlook

The flash estimate of 1Q real GDP for the Eurozone posted an improvement, to 0.1% qoq, up from the contraction of 0.1% qoq at the end of 2022. Among the core countries, all saw an improvement, but Germany was the weakest, reporting flat GDP on a quarterly basis, while Italy and Spain advanced by 0.5% qoq and France by 0.2% qoq in 1Q23. These improvements align with the upbeat message we saw in the business and consumer surveys, but are likely to worsen in 2Q. as the recent April business surveys flag a slowdown of activity in manufacturing and the impact of tighter monetary conditions gradually feeds into the economy. We maintain the view that the labour market will remain tight in the foreseeable future, and this will allow for real wage growth to swing back into positive territory next year. Overall, we have decided to recalibrate our real GDP forecast guidance up mildly for this year, to 0.6% (+0.2ppts), but down to 0.8% (-0.4ppts) for 2024E. The downward revision for 2024E reflects the growing risks that the ECB will tighten monetary policy too much, without providing a clear framework on how critical investment in the energy, digital and green transitions should advance, and that a tighter fiscal stance in 2024E will materialise exactly when monetary policy is at its tightest point.