According to the Q1 2019 GDP flash estimate, the Eurozone grew more than expected at +0.4% q/q, accelerating from +0.2% q/q in Q4 2018 which can partially be attributed to higher-than-expected inventory building. While external demand is expected to have remained weak in Q1, domestic demand, and in particular consumer spending, is likely to have accelerated as indicated by retail sales data in January and February. Going forward, we expect the Eurozone to fare better overall thanks to (i) resilient real wage growth, (ii) a positive fiscal impulse, (iii) a still very accommodative monetary policy stance, (iv) higher demand from China in H2 as the stimulus bears fruit and (v) rising economic confidence as key risks (escalation of the U.S.-China trade dispute, tariffs on U.S. car imports and a no-deal Brexit) fail to materialize. A potential inventory increase in Q1, however, poses a risk of a negative adjustment in the coming quarters if demand proves weaker than companies’ expectations.
