Europe's Surprisingly Stable Economy

Europe’s run of decent economic growth continued in the first quarter of this year, as what had been the worst performing region in the world earlier in this decade has found itself on firmer economic footing for the first time in nearly a decade.  While growth in Europe has not accelerated after peaking in 2015, neither has it fallen significantly, as many had expected it to do.  In fact, Europe is in the midst of its longest run of continuous economic expansion since the middle of the last decade and has finally managed to emerge from the series of crises that bedeviled the European economy between 2008 and 2013. 

One major reason for this has been the weakness of the euro, the pound and many other European currencies, a development that has allowed Europe’s export-driven economies to increase their competitiveness vis-à-vis many of their exporting rivals.  As growth has stabilized, confidence levels in Europe have risen and this could help to further extend Europe’s run of steady growth.  Nevertheless, as an export-dependent region, Europe still faces a number of threats to its economic well-being that could derail growth in the coming months and years.

What has been most comforting about Europe’s recent economic performance is the fact that it has been largely broad-based, with most European economies recording growth in recent months.  As Europe’s largest economy, Germany plays a crucial role in Europe’s economic performance and its steady growth in recent years continued in the first quarter of this year when it expanded by 1.7% on a year-on-year basis (0.6% quarter-on-quarter).  Likewise, Britain has been a key driver of growth in Europe for the past two decades and despite the impact of Brexit, the British economy has so far not slumped as much as had been expected (2.1% year-on-year GDP growth in Q1 2017).  Spain too continued its impressive recovery in the first quarter when it recorded 3.0% year-on-year GDP growth, defying expectations of a slowdown in early 2017.  Finally, Central and Southeast European economies continued to benefit from rising demand in West Europe, with Poland, Romania, Hungary and the Czech Republic all recording high rates of economic growth in the first quarter of the year.

While economic growth in Europe in early 2017 was quite broad-based, a number of important European economies continued to struggle, and some remain at risk of major slowdown later this year.  For example, the French economy continued to underperform most of its European counterparts in the first quarter of this year, as it recorded growth of just 0.8% on a year-on-year basis (0.3% quarter-on-quarter).  Likewise, Italy remains a weak link, although its economic growth rate of 0.8% year-on-year in the first quarter is noticeably higher than the growth rates it recorded for much of the past decade.  Finally, Greece fell back into a recession in the first quarter, and while the upcoming tourism season should provide a boost for the Greek economy, it remains incredibly fragile and will certainly face more financial pressure in the future. 

Add to this the fact that, while unemployment rates in Europe are trending downwards, they are doing so at a very slow pace and unemployment levels remain much too high in many European countries.  Furthermore, the region’s domestic market remains relatively weak, due in large part to the demographic decline underway across Europe, leaving many economies dangerously exposed to external pressures such as currency fluctuations and protectionism in key export markets.

A few months ago, it appeared that Europe’s rate of economic growth would slowly trend downwards over the course of 2017.  Now, it appears likely that growth rates will hold at levels near to those of the past two years for at least the next quarter or two.  As long as the euro, the pound and other key regional currencies remain relatively weak, export growth should continue, particularly as demand in key export markets improves in the coming months.  In fact, business confidence in Europe has soared in recent months, driven upwards by this improved outlook for exports. 

Of course, domestic demand in Europe is unlikely to rise significantly without a much faster decrease in the region’s unemployment rate, so the region’s need for export growth will remain in place.  As such, growth in Europe is unlikely to beat expectations in the coming months, as Europe’s growth ceiling of around 2% appears to be firmly in place.  Moreover, the outlook for the British economy is clouded by the uncertain impact of the UK’s impending withdrawal from the European Union, and no economy has contributed more to Europe’s economic growth over the past two decades than Britain.  Nevertheless, this relatively stable outlook for the European economy is welcome news following the turmoil of the previous years.