Bill Jamieson Eurozone – anything is better than Japan

COMMENT

BILLJAMIESON | Executive Editor of The Scotsman

Eurozone – anything is better than Japan

In a turbulent world even Europe’s modest growth is welcome.

Aglobal slowdown cushioned; a Greek implosion averted; Germany unruffled; France placid: what has been by any standards a turbulent year for the world economy has left Europe largely unscathed. Indeed, its economies have been doing rather better than expected – though expectations were never high.

Growth performance across the eurozone remains firmly stuck at between one and two per cent: Germany better than this, France worse. It hardly signals an economic region firing on all cylinders. But we should celebrate such modest growth in current circumstances more than we do: amid the gyrations of China’s economy, the sharp downturns in emerging markets and the slump in the global energy and commodity sectors it could all be so much worse.

The first three months of 2015 saw growth in the 19-strong euro area picking up to 0.5 per cent and slowing only a little to 0.4 per cent in the April-June period. Eurozone GDP growth has been locked in a narrow range around 0.4 per cent quarteron-quarter since the third quarter of 2014. Two factors explain this quiet resilience. First, the fall in oil prices, while causing problems for Norway and the north-east of Scotland, has broadly acted as a tax cut across the eurozone. It has worked to boost consumer spending, still the main growth driver despite all the exhortations for more balanced economic growth.

And second, low inflation has enabled the European Central Bank to keep interest rates ultra-low. Indeed, the spectre that continues to haunt all Western central banks is not consumer spending overheating or bottlenecks in the business sector but a lapse into prolonged Japan-style stagnation: not one but two decades of near moribund growth. To stave off this outcome the ECB embarked, albeit with notable delay and foot-dragging, on Quantitative Easing – providing money to the banks to enable them to boost lending and buy financial assets. And far from pulling back on this policy, ECB governor Mario Draghi has signalled he is prepared to step up the QE programme.

These two developments have brought about a third benefit for the eurozone, though one frustrating for UK exporters. It has helped to keep the euro lower than it would otherwise have been, helping eurozone – and especially German – exporters to cope with the downturn in demand from China.

Annual eurozone GDP growth is expected to have edged up to 1.7 per cent in the third quarter – the best annual growth rate since the second quarter of 2011. Preliminary data out already show that Spanish GDP growth held up pretty well at 0.8 per cent quarter-on-quarter. In Germany third quarter GDP growth is expected to have marked time at around 0.4–0.5 per cent.

Higher consumer spending of late has been making a big contribution to this growth tick-over. And the number of eurozone unemployed fell by 414,000 in the third quarter. Retail sales volumes grew 0.6 per cent in the July–September period, up from 0.4 per cent growth in the previous three months. However, external headwinds continue. Eurozone total goods and services exports fell 4.1 per cent month-on-month in August while imports dipped by a more modest 1.5 per cent month-on-month.

Annual eurozone GDP growth is expected to have edged up to 1.7 per cent in the third quarter – the best annual growth rate since the second quarter of 2011.

Slow ahead – but better than stop

What of the future? The euro area is likely to maintain a steady if unglamorous pace of recovery. The slowdown in China and emerging economies – accounting for some 25 per cent of eurozone exports – will hurt exporting companies. Germany in particular will be affected since it has been successfully exporting investment goods and luxury cars.

Already, German industrial orders have been falling while industrial production declined in the third quarter. Industrial output posted its steepest drop in more than a year in September, raising concerns that Europe’s biggest economy may feel a year-end chill from a slowdown in emerging markets.

The second straight fall in production, on the back of a sharp decline in industrial orders in September, prompted several economists to scale back their forecasts for German growth.

Other data for September showed France’s trade deficit has widened further, but Spain reported a bigger rise in industrial output than expected.

Despite the drop in output in Germany, several economists remained upbeat, noting that business surveys suggested recent weak data may mark just a temporary summer blip rather than the start of a prolonged slowdown.

And the ECB is poised to loosen monetary policy still further when its governing council meets in December. Spending on refugees, especially in Germany, should provide a modest fiscal stimulus – though the political fall-out for Chancellor Angela Merkel is unlikely to be anything like as benign.

Overall, the eurozone should be able to sustain steady growth over the coming months, barring a major downturn in global growth. While it is hard to see it enjoying a growth spurt, it should continue to show resilience. It looks on course for GDP growth of 1.6 per cent this year, edging up to 1.7 per cent in 2016. n