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08/12/2016

Pace of eurozone recovery slows

Euro & Finance

Pace of eurozone recovery slows

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The eurozone economy all but stagnated in the third quarter with France's recovery fizzling out and slower expansion in Germany, the latest growth data released today (14 November) showed.

Although the €9.5 trillion economy pulled out of its longest recession in the previous quarter, record high unemployment, lack of consumer and market confidence continue to choke a more solid rebound.

In the three months to September, the combined economy of the 17 countries sharing the euro grew by a slower than expected 0.1%. In the previous quarter it rose 0.3% – the first expansion in 18 months. The euro fell to a session low in reaction to Thursday's news.

The French economy contracted by 0.1%, snuffing out signs of revival from robust growth in the previous three months. It had been expected to post quarterly growth of 0.1% and has now shrunk in three of the last four quarters.

France arousing concern

German growth slowed to 0.3%, from a robust 0.7% in the second quarter, but Europe's largest economy clearly remains in much better shape. Its performance matched forecasts.

France is becoming a focus for concern within the currency bloc. The Bank of France predicts the economy will expand by 0.4% in the last quarter of the year but the government's labour and pension reforms are widely viewed as too timid.

"It was particularly disappointing to see France suffer a renewed dip of 0.1% quarter-on-quarter in GDP which highlights concern about its underlying competitiveness," Howard Archer, an economist with IHS Global Insight, said. A report on French competitiveness by the Paris-based Organisation for Economic Cooperation and Development warned that it is falling behind southern European countries that have cut labour costs and become leaner and meaner.

"To reduce the economic lag and lost time, France needs to keep up structural reforms," OECD chief Angel Gurria said. The report will be hard for the government to ignore since it was commissioned by President Francois Hollande.

Commission forecasts return to growth next year

German growth was fuelled by domestic demand. Exports faltered, another indication of the malaise gripping the rest of the eurozone. "Positive impulses came exclusively from inside Germany," said the German Statistics Office.

The European Commission forecasts the currency area will shrink by 0.4% over 2013 as a whole before growing by a modest 1.1% in 2014. It sees expansion accelerating to 1.7% in 2015. However, with unemployment in the bloc running above 12% and one in two young people out of work in Greece and Spain, talk of recovery rings hollow.

Italy matched France's performance, shrinking by 0.1%. The Netherlands eked out 0.1% growth. A senior Italian official told Reuters this week that the eurozone's third largest economy would return to growth in the last three months of the year, expanding by as much as 0.5% and ending nine quarters of slippage.

Iberian peninsula pulling clear of recession

Spain reported last month that it had pulled clear of recession in the third quarter, albeit with quarterly growth of just 0.1%, putting an end to a recession stretching back to early 2011.

Portugal is still struggling with austerity as part of its bailout plan yet managed to grow by 0.2% in the third quarter following stunning 1.1% expansion in Q2. Unlike other embattled eurozone states, unemployment has started to fall there too. Doubts about an unsteady Italian coalition government's ability to push through economic reforms remain a major concern for the euro zone. But France is climbing the worry list fast.

Both Spain and Portugal have had the outlook on their credit ratings raised to stable in recent days while Standard & Poor's cut France's rating to AA from AA+, still well above its Iberian neighbours but narrowing the gap.

The European Central Bank surprised markets with an interest rate cut last week, although that was more to do with evaporating inflation. "The sluggish growth outlook implies that disinflationary forces will likely remain in place for the time being. Against this backdrop, further monetary easing by the ECB certainly cannot be excluded, said Martin van Vliet, an economist at ING.

On Wednesday, ECB chief economist Peter Praet raised the prospect of the bank starting outright asset purchases if things got too bad. Bundesbank chief Jens Weidmann took the opposite tack, saying rates should not stay at record lows for too long.

Background

The European economy started to grow again in the second quarter of this year, after contracting in the first quarter, according to the Commission's Autumn European Economic Forecast, published on 5 November.

Economic surveillance of member states has been enhanced in several steps in reaction to the economic and financial crisis.

The new elements and annual schedule of surveillance required an adaptation of the scope and frequency of European Economic Forecasts.

Under rules that took effect in autumn 2012, the Commission must provide three forecasts - the traditional spring and autumn editions and a winter forecast to be published in the beginning of February.

Further Reading

European Commission

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