Eurozone recovery may not be sustainable

15th August 2013


The Eurozone has come out of the longest recession since the currency was founded with the European statistics authority estimating that economy grew by 0.3% over the second quarter compared to the first.

But economists and analysts say the recovery remains patchy, is failing to increase employment and may  not last.

Schroders European Economist Azad Zangana notes that the recovery remains uneven as the core export orientated economies continue to lead the way, while the smaller peripheral economies continue to struggle in their implementation of austerity.

Germany and Finland both recorded slightly stronger than expected growth of 0.7%, while France also outperformed expectations, achieving GDP growth of 0.5%. Italy and Spain which have already previously reported their growth numbers, -0.2% and -0.1% respectively remain in recession.

Elsewhere, Portugal provided the biggest surprise by posting 1.1% growth over the quarter – a huge upside surprise against the consensus.

Zangana says: “Details of the underlying drivers are thin for these initial estimates, but the French statistics office (INSEE) reported stronger growth in household consumption and changes to inventories as the key drivers to the pickup in French real GDP. The German statistics office (DESTATIS) reports an improvement in domestic demand, along with an improved contribution from net exports.”

“We expect the improvement in activity to continue across the Eurozone in line with the PMIs but, as with the latest data, also expect most of the growth to be concentrated in countries that have not been involved in the sovereign debt crisis, and will therefore benefit from a greater proportion of their GDP growth coming from net trade.”

He adds: “In terms of the impact on monetary policy, the better than expected growth figures, along with the  encouraging signals from private business surveys, may start to place pressure on the European Central Bank to take a more hawkish stance. However, only two months after the introduction of forward guidance and a significant amount of spare capacity, we doubt the ECB would consider tightening monetary policy anytime soon.”

Stewart Robertson, Senior Economist at Aviva Investors says: “At 0.3%, today’s growth figures are better news for the Eurozone, with the recession now ended in France and with Germany seeing strong growth of 0.7%. What the Eurozone is still missing however, is the jobs growth that is evident in other recovering economies such as the US and UK. We are actually still seeing a rise in unemployment in Europe, now close to 14% if Germany is excluded.

“There are reasons to believe that the GDP figure is not sustainable and might not be repeated in coming quarters.  This is true for both France and Germany, where the uptick in growth can be attributed to a number of one-off factors, including a cold winter where energy consumption was high and construction activity distorted, as well as by spending being brought forward in anticipation of tax rises. Some leading indicators, including jobless figures, are still worrying.”

“The ECB should not feel that the pressure is off on the back of these figures, as the peripheral markets still need to be a focus, as well as unemployment levels more broadly. In order for unemployment levels to fall there must be more flexibility in labour markets and sustained GDP growth of 1.5% – a pace we have not quite reached yet even with today’s encouraging numbers.”

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