Eurozone Economic Outlook: Q3 2018

Eurozone Economic Outlook: Q3 2018

The Eurozone economy has slowed down more than expected, with year-on-year growth of 2.3% in the first half of 2018.

Net exports made a negative contribution to growth and the global trade picture has worsened, but consumption and investment continue to support growth. Private sector confidence remains high, labour markets are still improving and borrowing costs are extremely low.

This overall positive outlook led the European Central Bank (ECB) to announce an end to its quantitative easing programme after December 2018, though it has also committed to maintaining its policy rates at their current low level until the autumn of 2019.

Eurozone GDP is expected to grow by 1.9-2.3% in 2018 and by 1.5-2.1% in 2019. Slow labour-productivity growth and an ageing workforce are likely to reduce GDP growth towards 0.9-1.9% in 2021-2025.


Indicator
2017%2018(f)%2019(f)%2020(f)%2021-2025 average(f)%
2018 forecast change
Percentage points

2019 forecast change
Percentage points
Real GDP Growth2.52.11.81.71.4-0.2-0.1
Inflation1.51.61.71.71.90.10.1
ECB Refinancing Rate0000.41.40.0-0.2

Long term negative effects from the global financial crisis

15th September 2018 marks the 10-year anniversary of the collapse of the Lehman Brothers investment bank and start of the global financial crisis. The following Eurozone crisis from 2011-2014 hit Greece the hardest and Greece exited its last fiscal bailout programme on the 20th August 2018.

Despite the more optimistic 2018-2019 outlook, large negative effects of the financial crisis on consumption and household income are likely to persist.

Confidence and consumption have declined, but are still above average

Private sector confidence (based on the European Commission’s Economic Sentiment Index) fell to more than 30% below its historical average at the height of the financial crisis. After an initial strong recovery in 2010-2011, it declined to below average again during the Eurozone Crisis. Since then it has climbed back to pre-financial crisis levels.

Consumption has increased by 1.5% year on year in the first half of 2018. Household balance sheets and labour markets have continued to improve, and consumer confidence remains above average.

Consumption is expected to increase by 1.3-1.7% in 2018 and by 1.3-1.9% in 2019, compared to a long-term trend of 1.3% growth.

Eurozone consumption per capita is still just 1.6% above its pre-financial crisis level. The Eurozone’s economy has significantly underperformed the US economy in 2001-2017 by this measure, due to the extra shocks of the Eurozone crisis, followed by a weak recovery.

The Eurozone average masks strong difference among the key Eurozone economies. German consumption per capita stagnated in 2001-2007, but it accelerated to a still mediocre 0.9% annual growth rate in 2008-2017. French consumption per capita increased at a similar pace as Germany’s for the whole of 2001-2017 despite the better overall economic performance of Germany.

Spanish consumption per capita has increased by less than 4% in 2001-2017 and is still 7% below its level in 2007. Italy’s economy has stagnated in 2001-2017 and the situation is even worse in terms of consumption per capita, which is 3.4% below its level in 2001.

Source: Euromonitor International from Eurostat and FRED

Slow labour productivity growth, lagging behind the US

Low labour productivity growth, below 1% annually in 2001-2018, has been one of the main negative factors for the Eurozone economy in 2001-2018.

Slow increases in labour productivity are a global phenomenon in the last 15-20 years, but the Eurozone economy’s performance has lagged behind the US, suggesting several Eurozone-specific factors. A smaller proportion of high-skilled workers and stricter product and labour market regulations relative to the US have reduced the ability of Eurozone firms to benefit from new information and communication technologies.

For Southern European countries such as Italy and Spain, the 2001-2007 credit boom following entry into the Eurozone was an important factor in reducing productivity growth. Lower borrowing rates and bigger credit inflows from other EU countries tended to benefit less efficient firms with better credit market access. Higher capital inflows also tended to raise the weight in GDP of services and non-tradable goods sectors with lower productivity, at the expense of higher productivity manufacturing. The pre-crisis credit boom reallocated production to less efficient firms and lowered aggregate labour productivity. The Eurozone crisis reversed these negative effects of the credit boom, but it also hurt labour productivity by reducing investment and new business entry.

Employment Recovery Almost Complete

The Eurozone’s unemployment rate was 8.3% in June 2018, down from 12.1% in mid-2013 and one percentage point above its lowest level in the first quarter of 2008. However, the unemployment rate may miss out many discouraged potential workers that have stopped looking for work.

The prime working-age (25-54 year-olds) employment rate is probably the most robust measure for gauging the health of labour markets, taking into account discouraged potential workers while filtering out the effects of population ageing and rising rates of university education.

The prime working-age employment rate in the Eurozone in 2018 is similar to levels from the early 2000s, though it remains below the highs of the pre-crisis boom.

The aggregate Eurozone employment rate has approached that of the US in 2005-2018. However, there are large cross-country differences: France and Germany have a higher prime working-age employment rate than the US, while Italy and Spain lag far behind.

by:

Daniel Solomon

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