Euro-zone Sustains Recovery on the Back of Robust Growth in Italy, Export Surge in Germany
Shrugging off worries about the Greek crisis, the Developed Europe region recorded a reasonably decent second quarter. At the end of June, the region’s most significant 19-country Euro-zone economy expanded 0.4 percent from the first quarter and 1.5 percent from the same period a year ago. The improved momentum in Italy’s economic recovery and the unexpected rise in Greek GDP despite its problems were some of the highlights of the Euro-zone growth story. Only one Euro-zone member, Finland, reported a decline in economic activity as it continues to struggle with the long-term decline of one of its flagship companies, Nokia.
Several factors contributed to the growth of the Euro-zone economy during the second quarter. Euro-zone exports for one benefited from a weaker euro vis-à-vis the U.S. Dollar while household consumption received a boost from low inflation and oil prices, ultra-low interest rates, and rising employment in many parts of the single-currency bloc. Also, financial-data provider Markit’s widely followed Euro-zone Composite Purchasing Managers’ Index (PMI), which tracks both the manufacturing and the services sector, showed increased activity in two of the three months in the second quarter.
At a Glance
Germany: The German economy gained momentum in the second quarter, expanding 0.4 percent from the first quarter and 1.6 percent from the year-ago period. Exports surged 2.2 percent during the period on the back of a weak euro and increased shipments to countries such as Britain and Sweden.
The U.K.: The British economy grew 0.7 percent in the second quarter, allaying worries that the substantially lower growth rate of 0.4 percent recorded for the first quarter reflected a loss of momentum in Britain’s recovery. British exports soared 6.6 percent in the second quarter despite a strong pound.
France: The French economy failed to grow at all between April and June as a slump in the manufacturing and construction sectors weighed on its performance.
Italy: At the end of June, the economy grew 0.3 percent from the first quarter and 0.7 percent from the same period a year ago. The Markit/ADACI Italy Services PMI remained in an uptrend all through the second quarter, with June recording a reading of 53.4.
Spain: During the second quarter, the economy recorded its fastest pace of growth since 2007, expanding 1 percent from the January-March period. Consumer spending too increased 1 percent in the review period, propelled by domestic high earners as well as tourism activities.
Looking ahead, the Euro-zone may continue to benefit from several helpful factors, such as rock-bottom interest rates, low oil prices, and the European Central Bank’s (ECB) current quantitative easing program, which has driven up bank lending to home buyers and consumers.
But there are hurdles too. For instance, the ECB quantitative easing program has still not been able to provide a boost to company lending. So, although lending to home buyers increased 1.6 percent in the second quarter and consumer credit grew 1.8 percent during the same period, lending to companies actually declined 0.2 percent. The Euro-zone’s double-digit unemployment rate too remains a deterrent for consumer spending in the region. The rate stayed unchanged at 11.1 percent all through the second quarter before slipping to 10.9 percent in July.
GERMANY: ECONOMY GAINS MOMENTUM ON EXPORTS SURGE
Europe’s largest economy gained momentum in the second quarter, expanding 0.4 percent from the first quarter and 1.6 percent from the year-ago period. Compared to the January-March period, when GDP grew 0.3 percent quarter-on-quarter and 1.2 percent year-on-year, the second-quarter growth figures are not a significant improvement. But, they are certainly heartening because most of the forward-looking data and surveys reported between April and June indicated a rather subdued second quarter for Germany. With concerns about the Greek crisis lingering all through the quarter, industrial output stagnated in May and industrial orders declined slightly, while all measures of business and consumer confidence reflected some degree of pessimism.
A breakdown of the GDP data, which was released by Germany’s Federal Statistics Office, indicates that exports were the engine of growth during the second quarter. Overseas sales, which account for nearly 50 percent of Germany’s national output today, surged 2.2 percent during the period on the back of a weak euro and increased shipments to countries that are within the European Union but do not use the euro, such as Britain and Sweden. A 0.2 percent rise in private consumption also contributed to growth, which shows that helped by record-high employment, robust wage growth, low inflation, and ultra-low interest rates, consumer spending remains a potent driver for the German economy.
In fact, moving forward, domestic spending is expected to offset any potential weakness in Germany’s export sector if the current slowdown in China persists. China is Germany’s third biggest trading partner and many German companies, such as automakers Daimler AG and BMW AG, have large sales operations in the Asian economy. But be that as it may, Germany appears well poised to cope with any setback in the event of a long-term slowdown in China. Together with strong domestic demand, the Euro-zone, which is a major market for German exports, could lend ample support to Germany. The Euro-zone economy is in a significantly improved state, recovering steadily from its longest-ever recession on the back of low oil prices a large monetary stimulus from the ECB.
THE U.K.: STELLAR PERFORMANCE IN THE SECOND QUARTER
According to the Office for National Statistics (ONS), the British economy grew 0.7 percent in the second quarter. The stellar performance not just exceeded expectations but also allayed worries that the substantially lower growth rate of 0.4 percent recorded for the first quarter reflected a loss of momentum in Britain’s recovery. The second quarter turned out to be noteworthy for other reasons too. For one, with the latest quarterly expansion, Britain’s GDP per capita reached the same level as its pre-crisis peak, which means that the economy has finally been able to regain all the output it had lost in the past 7-8 years on a per-capita basis. What’s more, at the end of June, the U.K. clocked its third longest phase of continuous growth in the past 60 years.
Robust growth in several key areas contributed to the second-quarter performance, indicating a broad-based, sector-wide growth of the economy between April and June. British consumer spending climbed 1.4 percent on an annualized basis, its biggest increase in the past five years. Services sector activity, which accounts for nearly two-thirds of Britain’s GDP, increased 0.7 percent, while the mining and quarrying sector expanded 7.8 percent, its fastest growth since 1989. The ONS has said that tax changes implemented in the March budget likely benefited the mining and quarrying sector. Industrial production grew 1 percent, although manufacturing, which is a sub-sector of industrial production, declined as the strong pound is reportedly hurting manufacturers in the export market.
However, overall British exports soared 6.6 percent in the second quarter, which is a surprising phenomenon given the pound’s strength and the environment of pessimism in many parts of the globe now. Media reports have expressed skepticism about the export data, with some even suggesting that the data may be revised in the future. In fact in the quarters ahead, one of the concerns for the British economy is that its export sector may underperform due to the strong pound. Consumer spending is another vulnerable area of the economy because strong growth has raised the possibility of the central bank hiking interest rates sooner rather than later. U.K. residents have been benefiting from ultra-low interest rates for close to six and a half years now.
FRANCE: GROWTH FALTERS AGAIN AFTER PICKING UP IN THE FIRST QUARTER
The French economy failed to grow at all between April and June, becoming the only laggard among its major peers in the Euro-zone during what turned out to be a solid second quarter for the single-currency bloc. The 0 percent growth, France’s worst performance since the first quarter of 2014, is especially disappointing because French GDP had expanded as much as 0.7 percent in the first quarter, fostering hopes that a strong recovery was finally underway in the country.
Evidently, a slump in France’s manufacturing and construction sectors weighed on its performance in the second quarter. Markit’s France Manufacturing PMI for both April and May indicated a decline in activity, although June saw manufacturing activity growing for the first time since April 2014. This trend, seen along with the subdued measures of business and consumer confidence for the second quarter, show that worries about the Greek crisis likely affected economic activity in France, which has significant trading interests within the Euro-zone. Similarly, the construction sector remained bogged down by a combination of factors, including government spending cuts.
Nonetheless, the good news is that things appear to be looking up for France in the near term. The approval of Greece’s third bailout package has most likely improved the outlook for the Euro-zone, France’s key trading partner. Not surprisingly, therefore, business confidence has been in an uptrend in the early third quarter. Moreover, with oil prices remaining low and the ECB continuing its monetary stimulus of rock-bottom interest rates in the region, consumer spending may pick up in the short to medium term.
One of the most discouraging aspects of the French economy though is its high unemployment rate, which has been hovering around 10.3 percent for quite some time now. Until the unemployment rate begins to fall, neither consumer spending nor the economy as a whole is likely to improve in a sustainable manner.
ITALY: RECOVERY GAINS MOMENTUM AMID STEADY SERVICES SECTOR REVIVAL
At the end of June, the Euro-zone’s third largest economy grew 0.3 percent from the previous quarter and 0.7 percent from the second quarter of 2014. The performance exceeded estimates, which had pegged quarterly growth at 0.2 percent and year-on-year expansion at 0.5 percent. What’s more, given that it grew 0.4 percent in the January-March period, Italy can now boast of having recorded growth for two quarters in a row, a distinction by Italy’s standards since it last reported a quarterly expansion in the third quarter of 2013.
A large part of Italy’s second-quarter performance can be attributed to the improving momentum in its services sector. The Markit/ADACI Italy Services PMI remained in an uptrend all through the second quarter, with June recording a reading of 53.4, significantly above the 50-level mark that separates growth from contraction. Markit has said that in June, activity in Italian businesses related to the services sector increased at the fastest pace in a year. Notably, the Italian economy has been growing in tandem with its services sector. After seeing a long period of declining activity, the services sector returned to growth in January and has been expanding steadily ever since. Incidentally, Markit’s Italy Manufacturing PMI too showed rising activity throughout the second quarter.
There are signs that Italy may continue its current good run in the coming quarters too. In early third quarter, both the services and manufacturing sectors reported continuing improvement in activity. What’s more, the country’s unemployment rate, which is one of the highest among developed nations across the globe, fell to a two-year low in July. Incidentally, the Italian government has raised its GDP forecast for this year from the previous 0.6 percent to 0.7 percent.
SPAIN: REGISTERS STRONGEST GROWTH SINCE 2007
During the second quarter, Spain’s economy recorded its fastest pace of growth since 2007, expanding 1 percent from the January-March period and maintaining its reputation as the poster child of the Euro-zone revival. Since emerging from a double-dip recession in mid-2013, the country has been able to achieve a rather consistent pace of growth on the back of strong consumer spending and robust exports, although exports are making less of a contribution now compared to the early quarters of the Spanish recovery. These two factors were at work in varying degrees during the second quarter too.
Overseas sales remained in an uptrend from April to June but the impact of export growth on overall GDP growth was offset to some extent by a corresponding rise in imports. Consumer spending though increased 1 percent in the second quarter, on par with the GDP growth rate, propelled by domestic high earners as well as tourism activities, which typically account for 10 percent of Spain’s GDP. Despite a high rate of unemployment, domestic consumption has been growing thanks to low inflation and oil prices, both of which have provided cash-strapped households more disposable income. Not surprisingly, June saw retail sales growing for the eleventh consecutive month.
Nonetheless, Spain’s economic outlook for the medium term appears to be mixed. With high levels of government and private sector debt, investment revival has not gained momentum. So, the Spanish economy remains heavily dependent on consumer spending and exports. While exports may continue to be propped up by a weaker euro and Spain’s strong export competiveness, there are concerns that consumer spending can grow only so much, given the uncertainties in the labor market. Spain’s unemployment rate (22.37 percent in July) remains the highest among large economies in the Euro-zone and a significant number of working Spaniards have temporary or low-wage jobs.
This article is for informational purposes only. This article is not intended to provide tax, legal, insurance or other investment advice. Unless otherwise specified, you are solely responsible for determining whether any investment, security or other product or service is appropriate for you based on your personal investment objectives and financial situation. You should consult an attorney or tax professional regarding your specific legal or tax situation. The information contained in this article does not, in any way, constitute investment advice and should not be considered a recommendation to buy or sell any security discussed herein. It should not be assumed that any investment will be profitable or will equal the performance of any security mentioned herein. Thomas White International, Ltd, may, from time to time, have a position or interest in, or may buy, sell or otherwise transact in, or with respect to, a particular security, issuer or market on our own behalf or on behalf of a client account.
FORWARD LOOKING STATEMENTS
Certain statements made in this article may be forward looking. Actual future results or occurrences may differ significantly from those anticipated in any forward looking statements due to numerous factors. Thomas White International, Ltd. undertakes no responsibility to update publicly or revise any forward looking statements.
