Q4 national account figures revealed a decline in GDP of 3.8% q/q AR (cons: -5.5%, DB -6.5%), down from Q3 growth of -0.5% q/q AR. The decline was smaller than expected, but the headline masks much weaker details, leaving the overall impression of a sharp contraction in domestic demand in Q4 unchanged. A large positive inventory contribution was the main reason for the positive surprise, which basically just moves growth from Q1 09 to Q4 08.

The report also confirmed that inflationary pressures are resuming fast both at the core and the headline level. The GDP deflator declined 0.3% q/q AR down from 3.9% in Q3. The core PCE deflator rose 0.6% q/q AR down from 2.4% q/q AR.


While the numbers revealed a more moderate decline in total GDP than we and consensus expected, this was all due to a 1.3%-point contribution to growth from a build-up in inventories. Private domestic demand declined by 5.0% q/q AR which is even worse than our forecast of a 4.3% q/q AR decline and the worst performance since the 1990 recession.

The details in the report confirmed the broad-based weakness in domestic demand, with consumer spending down 3.5% q/q AR, business spending down 19.1% q/q AR and residential spending dropping 23.6% q/q AR. We look for all of these sectors to contract further in Q1.

The contribution to growth from net exports was zero as imports showed a significant decline of 15.7% q/q AR, counteracting the impact from the collapse in exports, down 19.8% q/q AR. We expect net exports to turn into a drag on growth in the coming quarters as global growth is deteriorating fast.

Assessment & Outlook:

We find it puzzling that inventories have not been reduced in Q4. So far, monthly data for industrial production growth compared to manufacturing and trade sales has indicated that the inventory reduction has already begun. The Q4 GDP data are preliminary, so a revision cannot be ruled out. However, if taken at face value, there will be a large growth pay-back in Q1 as inventories are set for a large correction.

While private domestic demand has probably showed its worst performance during this cycle with the Q4 numbers, the potential inventory correction for Q1 implies that the overall decline in growth will be even larger than in Q4. We now look for a decline in the magnitude of 6% q/q AR in Q1 before a stabilisation in Q2. However, if the adjustment in inventories is done more gradually over the next few quarters, that would postpone the return to positive growth rates from Q2 to Q3 this year.