Growth Slows as Weak Exports Fail to Offset Robust Consumer Spending
The 19-country Euro-zone, which forms a substantial part of the Developed Europe region under our coverage, lost a bit of its growth momentum during the third quarter, signaling that the slowdown in the developing world is likely taking a toll on the export-focused single-currency bloc. According to the European Union’s statistics agency Eurostat, GDP in the Euro-zone increased 0.3 percent from the second quarter and 1.6 percent from the same period a year ago. But the third-quarter growth rate fell short of the 0.4 percent quarterly expansion clocked between April and June. Further, unlike the U.S. and the U.K. economies that have recouped all the output they lost during the crisis, the Euro-zone economy is still at least 0.5 percent smaller than its largest pre-crisis size (recorded in the first quarter of 2008).
Growth decelerated in nearly all the large economies of the Euro-zone between the second quarter and the third. Only France managed to improve its performance compared to the second quarter. Some of the other trouble spots in the Euro-zone were Portugal, which saw its economy stagnating in the third quarter, the Netherlands, which barely grew, Greece, which shrank 0.5 percent, and Finland, which contracted 0.6 percent.
An analysis of all the data published recently suggests that the slowdown in large emerging markets like China and Brazil weighed on the export sectors of several member economies of the Euro-zone and eventually hurt the Euro-zone as a whole. Nonetheless, consumer spending remained a bright spot for the Euro-zone economy during the third quarter as households increased purchases with their savings from lower energy prices. The other good news is that the unemployment rate in the Euro-zone slipped to 10.7 percent in October from 10.8 percent in September and 11.5 percent in October 2014.
At a Glance
Germany: Europe’s largest economy reported 0.3 percent growth in the third quarter, in line with estimates but slower than the pace recorded in the previous quarter. The unemployment rate declined to 6.4 percent in October, just shy of its lowest level since German unification.
The U.K.: The British economy expanded 0.5 percent during the third quarter. The pace of expansion fell short of estimates and the 0.7 percent growth rate clocked in the second quarter.
France: After stagnating in the second quarter, France regained its growth momentum between July and September. Still, the unemployment rate climbed to 10.6 percent in the third quarter, its highest rate in 18 years.
Italy: The Euro-zone’s third largest economy clocked 0.2 percent growth between July and September, a pace of expansion that fell short of expectations and the second-quarter growth rate of 0.3 percent.
Spain: Spain’s National Statistics Institute has reported that GDP in the country grew 0.8 percent between the second quarter and the third, in line with expectations but slower than the 1 percent growth achieved between April and June.
GERMANY: DOMESTIC SPENDING OFFSETS WEAK EXPORT GROWTH
Europe’s largest economy reported 0.3 percent growth in the third quarter, in line with estimates but slower than the pace recorded in the previous quarter. The Federal Statistics Office (FSO), which publishes the GDP data, said that the expansion was largely driven by private and government consumption as export growth weakened in the wake of the slowdown in emerging markets. According to the FSO, exports merely inched up 0.2 percent, their weakest pace of growth in nearly three years, but private spending rose 0.6 percent and government expenditure jumped 1.3 percent, its fastest rate of increase since the beginning of 2009.
Bloomberg reported that the arrival of an estimated 1.5 million refugees in Germany in recent months likely accounted for the spurt in government expenditure as public officials made arrangements to shelter the refugees. However, it is no surprise that private consumption turned out to be a key driver of growth in the third quarter. As evidenced by the latest quarterly data for private spending, Germany’s notoriously tight-fisted consumers appear to be buying freely, now emboldened by record-low unemployment and interest rates in the country. Germany’s unemployment rate declined to 6.4 percent in October, just shy of its lowest level since German unification.
Moving forward, the German economy is expected to continue benefiting from a number of growth drivers. For instance, job creation within the economy is likely to gain further momentum as a survey by the Ifo Institute shows that German companies, especially in the service sector, are planning to speed up hiring. Moreover, continued monetary policy support from the European Central Bank (ECB) should remain an impetus for consumer spending and investments in the country.
THE U.K.: SERVICES SECTOR CONTINUES TO POWER GROWTH
The British economy expanded 0.5 percent during the third quarter. The pace of expansion fell short of estimates and the 0.7 percent growth rate clocked in the second quarter. Year-on-year, Britain’s GDP increased 2.3 percent, its slowest rate of expansion since the third quarter of 2013. According to the Office of National Statistics (ONS), which publishes economic data in the U.K., third-quarter growth was held back by depressed manufacturing and construction activity. Manufacturing output declined 0.3 percent between July and September as a strong pound and weak demand from overseas economies, especially emerging markets, hurt British exporters. The construction sector contracted 2.2 percent.
Nonetheless, these setbacks were offset to some extent by a robust revival in mining and quarrying activities, which pushed up industrial production 0.3 percent between the second quarter and the third. The economy also received a boost from a 0.7 percent increase in services sector activity, which accounts for over two-thirds of the U.K.’s GDP. Moving forward, the outlook for the British economy in the short term appears mixed. On a discouraging note there are concerns that Britain is now excessively reliant on the services sector for growth.
But the good news is that the country should continue to experience robust domestic demand as strong wage growth and a low unemployment rate are expected to keep consumer sentiment high. Incidentally, the unemployment rate declined to a 7-year-low of 5.4 percent in the three months until August and average wages in the country grew 2.9 percent year-on-year during the three months until July, clocking their fastest pace of growth since the three months to January 2009.
FRANCE: ECONOMY BEGINS GROWING AFTER SECOND-QUARTER STAGNATION
After stagnating in the second quarter, France regained its growth momentum between July and September. The economy expanded 0.3 percent in the third quarter on the back of improved domestic demand and industrial production. With this, the country is now back on track to achieve its target of growing at least 1 percent in 2015. What’s more, if this quantum of annual growth is accomplished at the end of December, France will be able to end a four-year-long phase of below-par growth.
The French statistical office Insee has forecast 1.1 percent GDP expansion this year. However, the discouraging bit of news is that this pace of growth may not be sufficient to revive the French economy in a sustained manner. According to the Financial Times, economists have calculated that France must grow at the rate of at least 1.5 percent a year to be able to bring down its high level of unemployment.
Incidentally, the unemployment rate in France climbed to 10.6 percent in the third quarter, its highest rate in 18 years and a level just short of its highest-ever rate of 10.7 percent. France has been struggling to create jobs in recent years as its businesses have been bogged down by inadequate domestic demand and the loss of competitiveness in the global export market due to unsupportive labor laws at home. To the French government’s credit, though, a start has been made to bring about structural changes in the labor market. In September, a new set of labor reforms were announced and the government has confirmed that other steps are in the pipeline.
ITALY: GROWTH SLOWS DOWN DUE TO WEAK EXPORTS
The Euro-zone’s third largest economy clocked 0.2 percent growth between July and September, a pace of expansion that fell short of expectations and the second-quarter growth rate of 0.3 percent. The national statistics agency Istat has said Italy benefited from strong domestic demand during the quarter, which offset weak exports to some degree. However, the worry now is that with the deceleration in the third quarter, it has become difficult for Italy to meet its 2015 growth target. According to Bloomberg, the Italian economy would have to expand 0.8 percent-0.9 percent in the fourth quarter to achieve the annual growth target set in the government’s budget plan.
More importantly, current growth estimates in the budget are linked to Prime Minister Matteo Renzi’s sovereign debt reduction goals for 2016. In other words, slower-than-estimated growth may potentially create a shortfall in the amount of tax revenues the Renzi administration is hoping to garner next year, and this in turn could make it harder for the government to pay off public debt to the extent it plans to. Italy is one of the most indebted countries in the region, and its debt-to-GDP ratio is the highest among large European economies. In fact, September saw the country’s debt increase to $2.36 trillion. The government plans to reduce Italy’s debt-to-GDP ratio from 132.8 in 2015 to 131.4 in 2016.
On a positive note, the unemployment rate in Italy remained in a downtrend during the third quarter, falling to its lowest level in two and half years. This means that the Renzi government’s target of bringing down the unemployment rate below 12.2 percent in 2015 may be achieved.
SPAIN: ECONOMY ON TRACK TO MEET 2015 EXPANSION TARGET
After a good run in the first half of this year, the Spanish economy lost momentum in the period from July to September. Spain’s National Statistics Institute reported that GDP in the country grew 0.8 percent between the second quarter and the third, in line with expectations but slower than the 1 percent growth achieved between April and June. The good news though is that the Spanish economy, which is now 3.4 percent bigger than it was a year ago, remains on track to clock its fastest pace of annual expansion since the financial crisis of 2008. At the end of December, Spain is expected to record annual GDP growth of 3.3 percent, a rate significantly higher than the 1.4 percent rate reported for 2014.
According to the Wall Street Journal, the third-quarter deceleration can be attributed to the underperformance of Spanish businesses in Latin America, especially Brazil, where Spain has a significant presence. Further, monthly trade data indicate that although the growth in both exports and imports have weakened for Spain, export growth has slowed down faster, affecting GDP growth on the whole.
Encouragingly though the central bank of Spain has said that a recovery in domestic spending drove growth during the third quarter. Indeed, Spanish businesses appear to have been encouraged to add jobs as energy expenses have fallen and borrowing costs have been kept depressed by the loose monetary policy of the European Central Bank. Moreover, labor market reforms have enabled companies to be more flexible about hiring and firing workers. Consequently, Spain has been able to add at least one million jobs since January 2014, which in turn has provided a boost to consumer sentiment.
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