Europe's Economic Recovery Has Peaked

As expected, economic growth in Europe as a whole held steady in the third quarter of this year, as Europe’s economic recovery has been unable to gain any additional momentum in recent months.  In the third quarter, the 28-member European Union saw its economy expand by a rate of 1.8% on a year-on-year basis, the exact same rate of growth recorded during the first two quarters of this year.  Likewise, the 19-member Eurozone recorded growth of 1.6% year-on-year in the third quarter, matching its growth from the previous quarter.  This is a sign that Europe’s recovery from the series of crises that led to multiple recessions across Europe has plateaued, with growth rates hovering just below 2% for the region as a whole.  Meanwhile, there are a number of worrying signs that suggest that this recovery is set to lose steam in the coming months, leading to lower rates of growth across Europe.

In contrast to previous years, much of the positive economic news out of Europe in recent months has come from the crisis-hit countries of southern Europe.  For example, Spain continued its strong run of solid economic growth (3.2% GDP growth) in the third quarter, while Portugal (1.6%) and Italy (0.9%) performed better than had been expected.  Even Greece managed to surprise on the upside as its economy expanded by 1.5% year-on-year in the third quarter, the highest rate of growth in that country in eight years.  Much of this growth in southern Europe was driven by the very strong performance of the region’s tourism sector, which has benefitted from the unrest that has damaged the tourism industries in Turkey and North Africa in recent years.  In addition, economic reforms, coupled with much lower labor costs in the wake of the region’s debt crisis, have improved southern Europe’s economic competitiveness, enabling the region to attract more investment for the first time in nearly a decade.

While southern Europe recorded higher rates of economic growth in the third quarter, many northern European countries experienced lower growth during this period.  In Germany, the region’s largest economy, year-on-year GDP growth held steady at 1.7%, but quarter-on-quarter growth slowed to just 0.2%.  Likewise, France’s economy expanded by just 1.1% year-on-year in the third quarter and is likely to struggle to record stronger growth in the months ahead.  Economic growth in the United Kingdom managed to surprise on the upside (2.3%), but much lower rates of growth are forecast as the impact of Britain’s impending withdrawal from the European Union begins to negatively impact the British economy.  Even Poland, Central Europe’s best performing economy in recent years, is experiencing more turbulence as GDP growth slowed to 2.1% year-on-year in the third quarter due to falling investment levels there.  Overall, the large economic competitiveness advantage that many northern European countries enjoyed over their southern European counterparts has been eroded by the recent reforms and the lower labor costs in southern Europe.

While 2016 has proven to be a year of muddling through for the European economy, there are a number of reasons for concern while looking to the future.  First, Europe’s growth ceiling has fallen to just 2%, well below the growth ceiling in the region before the global financial crisis.  This means that it will be very difficult for Europe as a whole to generate growth rates in excess of 2% for any extended period of time.  Furthermore, many of the key drivers of Europe’s recent economic growth, including Britain, Spain and Germany, are showing signs of weakness, and each country has had its economic growth forecasts for 2017 and 2018 reduced in recent months.  Across the region, domestic demand levels are largely stagnant as the region’s demographic situation worsens.  Likewise, the gains in terms of export growth that have derived from the recent weakness of the euro are being offset by uncertainty in key export markets, reducing the potential for growth for most of the region’s export-dependent economies.  As a result, growth rates are likely to fall in late 2016 and throughout 2017, although a sharp downturn does not yet appear to be a serious threat, at least over the near-term.