Europe's Growth Perks Up
A flash GDP estimate showed the growth rate nearly doubling in the Eurozone to an annualized pace of over 2.5% in the first quarter. This compares to the equivalent U.S. rate of 0.5%. Europe is regaining its footing after two recessions (see our industrial forecasts here).
Even without detailed data available as yet, it’s easy to surmise the underlying momentum. The jobless ranks fell by 360,000 and in the first quarter—this is a substantial movement in a highly regulated European market. Consumption expenditures must have jumped in tandem, boosting business sentiment along the way. At the same time, exports powered ahead, fueled by the delayed effect of the cheaper euro. The current account position (mostly made up of a trade surplus) rose by €60 billion over the cumulative 12 months ending in February—that’s a full 0.5% of GDP.
Not all is rosy, though. The geographical cleft between the go-getters and lag-behinds is widening. Italy, Greece, Portugal, Spain, and a few others strain to fix their banks, narrow fiscal deficits, and shake off morose sentiments. Prices continue to sag (annual inflation net of energy and food stood at 0.7% in April), causing strains within the ECB and its loose monetary policy. Downside risks abound: Greece is approaching another payment threshold while some banks’ liquidity and solvency come under pressure of low (or negative) interest costs.
The upturn affects mostly services—growth in industrial production remains subdued, mirroring the feeble propensity to invest observed in the United States. The two sides of the Atlantic share the glut of saving amid tamed animal spirits of corporate boards.