Growth Returns to Europe

euro zone gdp

Last week, we talked about signs of stability in Europe. This week, we got even better news: Gross domestic product (GDP) for the 17 countries that use the euro as their currency increased at a 1.2% annual rate in the second quarter of 2013, the first increase in the region’s GDP since the third quarter of 2011. In addition, other European nations that do not use the euro, notably the United Kingdom, also recorded solid economic growth in the second quarter. The preliminary data for July in Europe and the U.S. were generally positive. Finally, in Asia, Japan’s second quarter GDP grew at a slower pace than in the first quarter.

The key economic statistics released this week included:

       •       Eurozone GDP grew at a 1.2% annual rate in the second quarter of 2013. This is the first quarter of growth since the third quarter of 2011, and the strongest growth in more than two years. The strongest economies in the region were Germany, where GDP expanded at a 2.8% annual rate and the United Kingdom, with 2.4% annually rated GDP growth. France, which had seen its GDP decline in three of the previous four quarters, recorded a 2.0% annual rate of growth.  

       •       Other European economic data released during the week were generally positive. In the U.K., employment data for the second quarter were also positive, as the nation added 69,000 jobs in the quarter and 330,000 from a year ago. July retail sales in the U.K. also increased sharply, up 1.1% for the month, as unusually warm weather boosted spending. In Germany, investor confidence increased in August, as measured by the ZEW indicator of economic sentiment. Finally, Eurozone industrial production surged 0.7% in June, led by a strong increase in German output.

       •       It’s not all positive in Europe, however. The industrial sector of Spain recorded a steep drop in orders in June, and French employment fell in the second quarter.

       •       Outside Europe, the U.S. economy saw continuing steady growth in retail sales and flat industrial production. But labor markets continue to improve as unemployment claims hit a near 6-year low.

The key story of the week is the mounting evidence of recovery in Europe. It now appears likely that most European nations will see their economies expand during the second half of 2013 and in 2014. This is a positive for the entire global economy. The 27 nations that make up the European Community are the largest economic bloc in the world, with a total GDP of approximately $17 trillion in 2012 (compared with $16.2 trillion in the U.S.). These nations are a critical component of global demand, and weakness in Europe has dampened demand for goods and services throughout the developing and developed world.  

In the U.S., for example, exports to the European Union fell steeply during the 2007-2009 recession, recovered in 2010, but fell again last year and are still well below their pre-recession level. Recovery in Europe will boost economic activity throughout the world.

However, we need to be cautious before declaring an end to the economic troubles in Europe. Although the larger economies expanded in the second quarter, the southern tier nations — Spain, Italy, and Greece — remain weak and fragile. Italy contracted in the second quarter, and, while there is no GDP data for Spain or Greece yet, other statistics suggest it is unlikely that these nations expanded in the spring. Further deterioration in these countries and/or new sovereign debt issues in any of the Eurozone nations could slow or reverse the nascent recovery. The recovery is not yet firmly entrenched and could be reversed in the event of another shock, financial or otherwise.

In addition, Germany, the largest economy in Europe, will hold Parliamentary elections on September 22. The current German government has been an important supporter of the current supportive policy of the Eurozone. If a new government is elected that is less inclined to support the current approach to the sovereign debt issue, it could be the kind of shock that would reverse the Eurozone recovery.

Conclusions. As we noted last week, the second half of 2013 is shaping up to be better than the first, as the global economy transitions to a stronger growth pace in 2014. Growth in Europe is a key piece to the 2014 story, and this week’s data suggest that is likely.

There are still significant risks in Europe and in the global economy overall. The major economies of the world are not yet robust enough to withstand a major shock. The events in the Middle East this week show us that those shocks can occur anywhere, at any time.

But for now, the data continue to support the cautious optimism that has been our fundamental position on the U.S. and global economies throughout 2013.

Leave a Reply