Europe's Economic Slowdown Has Begun

Over the past year or so, a number of developments have occurred that suggested that Europe’s recent run of relatively strong economic growth was likely to come to an end over the course of 2018.  On one hand, Europe’s recovery in recent years was driven largely by weaker currencies that allowed export-dependent European economies to improve export competitiveness vis-à-vis their main rivals outside of Europe.  At the same time, uncertainty continued to rise over the state of global trade and investment as protectionist sentiment spread and formal and informal trade barriers began to appear all around the world, jeopardizing Europe’s ability to increase its export revenues.  Meanwhile, regional factors also began to weigh heavily on many of Europe’s leading economies.  For example, the uncertainty over Brexit has contributed to the sharp slowdown of the British economy, damaging the country that contributed more to European economic growth than any other EU member state over the past 25 years.  At the same time, low wage growth and an unfavorable demographic situation continued to reduce growth on Europe’s domestic markets.  Altogether, these factors pointed to a looming slowdown for the European economy.

Considering these factors, Europe’s economic results during the first three months of this year were about what had been expected given the worsening economic climate inside and outside of Europe’s borders.  In the first quarter of 2018, the European Union’s economic growth rate slowed to 0.4% quarter-on-quarter (2.4% year-on-year), its lowest level since the third quarter of 2016.  Likewise, the Eurozone’s economy also expanded by just 0.4% quarter-on-quarter (2.5% year-on-year) in the first quarter of this year.  While these results can be considered respectable by the standards of the past decade, they nevertheless represent a sharp decline from the growth rates recorded in Europe in late 2016 and throughout 2017.  Given the fact that the business and investment climate that contributed to this slowdown is forecast to remain in place in the coming months, it appears likely that the European economic recovery that began in 2014 peaked last year, and that a gradual slowdown is now in store for most European economies.

Worryingly for Europe, each of the region’s three largest economies recorded significantly lower rates of economic growth in the first three months of this year.  Europe’s largest economy, Germany, saw GDP growth fall to just 0.3% quarter-on-quarter during this period, as consumer and government spending both weakened.  In France, GDP growth also fell to just 0.3% quarter-on-quarter in the first quarter, as domestic consumption and investment levels both fell during that period.  As for Britain, its economy expanded by an anemic 0.1% quarter-on-quarter in the first quarter, its worst performance in nearly six years.  While Europe’s three largest economies all performed poorly in early 2018, there were a few bright spots for the European economy.  For example, Europe’s fifth-largest economy, Spain, continued to grow at a very healthy pace, with GDP growth remaining at 0.7% quarter-on-quarter (2.9% year-on-year) in the first quarter.  Likewise, Poland’s economy remained one of Europe’s fastest-growing, with GDP growth soaring to 1.6% quarter-on-quarter (4.9% year-on-year) in the first quarter. 

If recent trends continue, Europe’s economy could face some difficult days ahead.  Without question, too many European economies remain dangerously dependent upon exports outside of Europe to generate a significant portion of their growth.  At the same time, despite the fact that the euro has depreciated by 4% against the US dollar in recent weeks, the euro and other European currencies remain relatively overvalued, costing European economies a good deal of their export competitiveness.  Furthermore, uncertainty over the near-term outlook for trade and investment is denting confidence among businesses and investors in Europe, adding to the downwards pressures facing many European economies.  As domestic demand in Europe is unable to pick up the slack caused by these external factors, Europe’s growth prospects have dimmed, especially as the region’s key drivers of growth, Britain and Germany, appeared headed for a longer-term slowdown.  Therefore, it appears that Europe’s recent run of respectable economic growth is coming to an end, and the question is now, how fall will economic growth in Europe fall in the months and years ahead.