Q3 Euro GDP - Stagnation, Russia or Oil?

One of the pressing questions in oil markets is the extent to which low oil prices will stimulate oil demand.  Generally, demand follows GDP, so a first order approximation involves taking a look at GDP growth, in this case, in the Europe, where Eurostat released the Q3 flash GDP figures yesterday.  

Given that a supply-constrained approach asserts that oil drives GDP (when supply is constrained), a substantial fall in oil prices should boost GDP, particularly in those countries with high oil import burdens.  Indeed, such is the case in the "PIGS" (Portugal, Greece, Ireland and Spain), whose oil import bill today is still nearly twice that of a decade ago, even after massive consumption reductions typically averaging 25% since 2005.  Therefore, we might postulate that easing oil prices would tend to help these countries the most. 

Lower oil prices should also help the advanced countries like Germany and Austria, but less so, since oil is a smaller share of GDP and total imports, and those countries run habitual trade surpluses, placing less pressure on them to re-balance their current accounts.

Those are the expectations.  Here's what the data says:

Annualized Real GDP Growth, Quarter on Previous Quarter, Select Euro Country Groups

Source: Eurostats, OECD

This shows that the "PIGS" are indeed recovering, in part due to structural changes (ie, a swing to current account surpluses) and, I would argue, more favorable oil prices.  For those who argue that lower prices should help the "PIGS" the most, the data is a friend.

On the other hand, growth has faltered most in the countries with direct Russian exposure: Germany, Austria, Finland, Estonia, Poland, and Hungary.  By contrast, France and Italy, which have less exposure to Russia, have actually seen improved GDP growth in Q3 2014.   Thus, the simple interpretation is not that Europe is sliding back into recession.  The "PIGS" are actually doing well, and France and Italy are doing no worse than their general level of national governing incompetence would suggest.

Rather, Russia is weighing down its immediate neighbors, reducing GDP growth by about 1 percentage point compared to expectations.  This should hardly come as a surprise if one reads the news.

Therefore, the calls for added stimulus in Europe miss the point.  The Russia-exposed countries need to figure out how to live without Russia, and that simply takes time.  On the other hand, the PIGS are showing that growth--even pretty decent growth--is possible in Europe under current conditions. 

From an oil perspective, expect unexpectedly strong growth from Europe, particularly from the "PIGS" (some of which we have already unexpectedly seen).  These trends will strengthen.  Further, expect an unexpected rebound in oil consumption in the PIGS, on the order of 10% in the next 2-3 years, assuming that oil prices remain restrained.  It's a good time to make a bet on domestic oil consumption in the PIGS, perhaps picking up a refinery or retailing network, or possibly an auto dealership. 

But avoid France and Italy.  The problems there have to do with governance, not structural or cyclical issues.  Spain, Greece and Portugal: that's where to place your bets.