Interpreting Europe's First Quarter Economic Results
While the European Union’s rate of economic growth accelerated slightly in the first quarter of 2015, there was nevertheless a sense of disappointment as the EU economy did not expand at an even faster rate, given the favorable economic climate in Europe at the moment. Higher growth rates had been expected, considering the fact that many of Europe’s leading economies are benefitting from improved export competitiveness thanks to a weaker euro, lower oil prices, and an influx of funding due to the European Central Bank’s quantitative easing program that was launched this spring. Nevertheless, after years of economic struggles, any growth recorded in Europe is welcome news and could set the stage for higher rates of growth in the coming years.
Overall, the European Union’s economy expanded by 1.4% year-on-year (0.4% quarter-on-quarter) in the first quarter of this year, a result that was slightly below expectations. As for the Eurozone, its 19 members saw their economy expand by 1.0% year-on-year (0.4% quarter-on-quarter). Among Europe’s larger economies, Britain remained the standout performer (2.4% year-on-year growth), despite a slowdown in the first quarter. The region’s largest economy, Germany, had a disappointing first quarter as its rate of economic growth slowed to 1.0%, well below expectations. In contrast, France’s 0.7% GDP growth rate may seem a very poor result, but the fact that the French economy grew by 0.6% on a quarterly basis was quite a positive surprise.
Most of the headlines involving the European economy in recent weeks have been focused on the debt crisis in Greece and the potential of a new economic downturn across southern Europe. In Greece, the tentative economic recovery that began last year is already in danger of collapsing, as the Greek economy grew by just 0.3% year-on-year in the first three months of this year. However, results in other parts of southern Europe suggest that Greece’s troubles are, thus far, confined to its borders. For example, the Spanish economy grew by a respectable 2.6% in the first quarter, while the Portuguese economy expanded by 1.4%. Even Italy, Europe’s worst performing economy over the past 15 years, managed not to shrink in the first quarter, with GDP growth of 0.0%. This indicates that those southern European economies that did the most to improve their export competitiveness in the wake of the region’s debt crisis are the ones that are now able to record higher rates of economic growth.
Looking ahead, we expect economic growth rates in the European Union to remain near current levels, despite all of the favorable factors impacting the region’s economy. On the positive side, export demand in North America and parts of Asia will strengthen, providing a solid boost for those European countries that can export effectively outside of Europe. Moreover, the euro is unlikely to strengthen much in the coming months and labor costs in most European countries will not grow as fast as those in many of its competitors outside of Europe, enabling Europe’s export competitiveness to improve. On the downside, domestic demand in Europe is likely to remain very weak, despite the slightly higher rates of economic growth in the region. Moreover, a lack of research and development spending and increasing international competition in many of the economic sectors in which Europe is a major player will continue to hold down growth rates in Europe. As a result, Europe is, as we have been predicting for a long time, in the midst of a prolonged period positive, but sluggish, economic growth that will see GDP growth rates remain near present levels.