The European Economy Stagnates

Last week’s release of the third quarter’s economic growth results in the European Union was overshadowed by the terrorist attacks in Paris, but these results are worth noting as they indicated that Europe’s tentative economic recovery may already be running out of steam.  Moreover, many of the underlying weaknesses of the European economy clearly remain in place and are proving to be a major impediment to growth in Europe.  In fact, the growth ceiling for Europe’s economy appears to have fallen even further in recent years as domestic market growth in Europe is nearly certain to remain low.  Given the fact that many of Europe’s leading export markets are currently struggling, this bodes ill for the outlook of many of Europe’s most important economies in the years ahead.

For the second consecutive quarter, the European Union’s year-on-year GDP growth rate was 1.9%, while its quarter-on-quarter growth rate was 0.4%.  In the Eurozone, growth was a little less (1.6% year-on-year and 0.3% quarter-on-quarter) during this period, reflecting the stronger growth in peripheral economies in Europe.  Much of this growth in Europe was driven by the region’s largest economies.  For example, Spain’s economic recovery continued last quarter (3.4% year-on-year GDP growth), while even as the British economy slowed (2.3%), it remained one of the stronger economies in Europe.  In contrast, Germany’s economy (1.7%) continued to be held back by weaker demand in China and other emerging markets.  Meanwhile, France’s economy (1.2%) continued to struggle to record higher rates of growth, while Italy’s growth (0.9%) remained anemic, although this was the highest rate of growth in that country in recent years.

The results for many of Europe’s smaller economies were less than stellar in recent months, as their dependence upon exports for growth has proven to be a burden at a time when the global economy is struggling to record high rates of growth.  For example, export-dependent economies such as Finland (-0.7% year-on-year GDP growth), Austria (0.8%), Belgium (1.3%) and the Netherlands (1.9%), all recorded lower rates of growth in the third quarter.  Meanwhile, Greece’s tourism-driven short-term economic recovery came to a crashing halt as the Greek economy contracted by 0.4% year-on-year last quarter due to the financial crisis that rocked the country during that period.  Altogether, Europe’s smaller economies proved to be a significant drag on the European economy and will remain so as long as export demand remains depressed.

Europe had hoped that a more robust economic recovery would be underway by now.  Unfortunately, just as many of Europe’s domestic markets were beginning to show signs of stronger growth, the region’s external environment has worsened, resulting in lower rates of export growth, even at a time when the euro has lost much of its value against currencies such as the US dollar and the Chinese yuan.  Moreover, the prospects for higher rates of growth in 2016 have dimmed as domestic demand growth in Europe is forecast to level off and as export demand is expected to remain weak.  Moreover, business and investor confidence levels in Europe are likely to wane in the coming months, while new stimulus measures by the European Central Bank are unlikely to have much of an impact on growth in Europe.  In fact, it appears that the long-term economic growth ceiling in Europe has approached the 2% level, well below the apparent growth ceiling in the United States (around 3%) and below the growth ceiling that was in place in Europe prior to the global financial crisis.  Add to this mix the risk of more political unrest inside and outside of Europe and it is clear that the outlook for the European economy is dimming at a time when the region should be in the midst of an accelerating recovery.