Eurozone economy quietly outshines the US

Positive data highlight strength of bloc despite depiction as under performer

Donald Trump’s plans to boost the US growth rate may be getting plenty of attention — but it is the euro zone economy that is quietly exceeding expectations.

Figures for business sentiment, growth rates and unemployment for the single currency area have all provided positive surprises during the start of this year, as business confidence proves resilient despite Britain’s vote to leave the EU.

The euro zone economy has now posted 14 consecutive quarters of growth, the unemployment rate has returned into single digits, and economic sentiment has reached its highest level in six years. The numbers contrast with common depictions of the euro zone economy as stagnant, sclerotic and perennially under performing.

“I certainly continue to be amazed by the skewed negativism towards Europe,” says Erik Nielsen, chief economist of UniCredit, who says such views are “mostly based on what seems like superficial attention to the data — or, maybe, to ‘alternative facts’ .”

In fact, job creation for the euro zone accelerated to a near nine-year record in January, while the rate of output growth maintained a 5½-year high.

The final Markit Euro zone PMI® Composite Output Index — which measures managers’ confidence — was firmly in positive territory, at 54.4, the 43rd straight month in which it has signalled expansion.

Despite deep concerns about Italian banks and Greece’s long running financial crisis, euro zone growth in the fourth quarter of last year was estimated at 0.5 percent, faster than the US rate. For 2016 as a whole, growth in the euro zone outpaced that in the US by 1.7 percent to 1.6 percent.

Analysts agree on the reasons for the relatively robust economic performance of the euro zone: the financial crisis is now nearly a decade old; there is plenty of slack from unemployment to absorb; and the UK’s vote to leave has not proved the shock many feared. Furthermore, the European Central Bank’s ultra loose monetary policy is now finally working, encouraging households and companies to borrow and spend. Domestic demand has fuelled most of the recent growth.

While Peter Navarro, head of President Trump’s new National Trade Council, accused Germany of “continuing to exploit other EU countries”, growth rates have improved across the euro zone, with the important exception of Italy. Spain grew 3.2 percent in 2016 and growth in France has also improved rapidly from a contraction in the second quarter.

Focus Economics, which collates economic forecasts, notes that the biggest upgrades to growth expectations in 2017 are in Europe. Even in 2018, when Mr Trump’s tax cuts and infrastructure spending stimulus are expected to have most effect, recent upgrades to forecasts of euro zone growth are on a par with the US.

Some economists are convinced that Europe is suffering more from a pessimistic narrative about its performance compared with the US than anything much more substantial.

Mr Nielsen of UniCredit points out that, over the past decade, growth of GDP per head in the euro zone averaged 1.9 percent a year, “not a huge difference” to the 2.4 percent rate recorded in the US. He adds more of that growth will have been felt by ordinary families in Europe, since inequality is not rising as fast as in the US.

Nevertheless, with fragmented financial markets and big problems remaining in some peripheral countries, such as Italy and Portugal’s weak banking sectors and high public debt, there are reasons to doubt whether Europe’s recent rise is sustainable.

Dhaval Joshi of BCA Research argues that growth in credit has partly fuelled the surprising improvement — and that since the credit growth began to slow towards the end of last year, the “[eurozone] economy’s latest ‘mini-upswing’ is likely approaching its end.”

Officials are equally cautious, not wanting to high-light the improved prospects for fear this will increase pressure, particularly in Germany, for tighter monetary policy. Peter Praet, chief ECB economist, says: “The current environment still falls short of a sustained adjustment in the path of inflation to levels closer to 2 percent over the medium term”.

The likely consequence of such a view is that the ECB will continue to allow momentum to build in the economy to boost inflation and reduce unemployment — a contrast with the US Federal Reserve’s signals that it will keep slowly raising interest rates.

If the two central banks keep on such divergent paths, with the ECB keen to keep the euro

zone economy humming, Europe might not be able to keep quiet about its surprisingly strong performance for very much longer.

(Source – Financial Times, 05-February-2017)