GDP growth: acceleration in the second quarter, with a less than optimal mix of drivers

GDP rose by 2.6% in the second quarter, a marked improvement compared to the (revised) rate of 1.1% registered in Q1. But apart from the fact that seasonally and working day adjusted GDP only grew by 1.8% year-on-year, the structure of growth is not without problems, either.

On the expenditure side, not just galloping private consumption expenditures (by 5.1%) and the re-dynamization of exports were the drivers of growth: inventory growth was also instrumental in blunting the drag effect coming from the continuation of the plunge in fixed capital formation (by 20% in Q2). But inventory growth is not a reliable driver of growth, and consumption may slightly decelerate in the near future (as the July retail trade data suggest), and export growth may also take a hit (as the July industrial data suggest).

On the production side, surprisingly dynamic expansion of agricultural output was an important factor behind the relatively good pace of growth, beside the (temporary) revival of industrial dynamism and the sustained expansion of services (still strongly supported by tourism). This is far from bad news in itself, but it means that the growth performance in 2016 will depend on a factor, agricultural output, that is at least as as dependent on the weather as on demand factors. This implies that the yearly growth figure may give the impression that the overall conjuncture is  more robust than it actually is.

Industrial growth will decelerate in the third quarter. On the expenditure side, investments may continue to fall at a steep pace, due to the still very slow disbursement of the newly eligible EU funds, hence the growth outcome is uncomfortably dependent on the evolution of inventory change, amid growing uncertainties regarding export and consumption growth. Our growth projection – 2.2% for 2016 – is still viable, but the related risks are more pronounced than previously.