Europe's Fragile Recovery Has Already Stalled

2016 was touted by many European leaders as the year in which the European economy finally shook off seven years of sluggish growth and returned to growth rates more closely aligned to those of the years before the region’s economic crisis.  Earlier this year, this prediction appeared to have a chance of coming true as growth rates in many areas of Europe rose as they continued to gain momentum from the upturn in growth that began in mid-2015.  However, the results from the second quarter of this year have shown that this acceleration in economic growth has already come to an end.  In fact, fears are rising that the European economy could be on the brink of another significant slowdown in the second half of this year, with many of the region’s leading economies facing the prospects of lower growth rates in the coming months.  While we do not expect another recession in Europe in the near future, there are many troubling signs for Europe’s near-term economic future.

Overall, economic growth rates slowed in the European Union and the Eurozone in the second quarter of this year.  For the 28-member European Union as a whole, GDP growth was 1.8% on a year-on-year basis, and it slowed to 0.4% on a quarter-on-quarter basis.  For the 19-member Eurozone, GDP growth slowed to 1.6% on a year-on-year basis, and fell to just 0.3% on a quarter-on-quarter basis.  Sharp quarterly economic slowdowns were recorded in each of the Eurozone’s three largest economies (Germany, France and Italy), reinforcing the fact that the Eurozone’s core economies continue to struggle to generate significant growth.  In contrast, stronger growth rates were once again recorded in peripheral European economies such as the United Kingdom, Spain and Poland, the same three countries that have been the leading drivers of economic growth in Europe over the past 18 months.  

Most of southern Europe’s economies remain a major concern as they face sluggish growth and a series of threats to their economic and fiscal well-being.  In recent months, much of the focus has been on Italy and its fragile banking sector, and the news that the Italian economy failed to grow in the second quarter will raise fears that Italy’s long-term economic stagnation is continuing.  Meanwhile, France’s failure to enact meaningful economic reforms, coupled with its recent labor unrest, resulted in that country also failing to grow in the second quarter, suggesting that France too could face the prospect of longer-term stagnation.  Elsewhere, Greece and Portugal remain major threats to the region’s economy, although both are benefitting from higher tourism revenues this year thanks to the crises in North Africa and Turkey (as well as the weak euro).  Finally, Spain’s economy has managed to continue to record strong growth rates for now, but that country’s ongoing political stalemate could begin to impact the Spanish economy in the second half of this year.

Overall, Europe’s economic growth over the past 18 months has been driven by two factors, the region’s improved export competitiveness thanks to the weak euro and the strong performance of the region’s peripheral economies.  However, the weak euro helped to mask the weaknesses of the region’s domestic markets and now, with many key export markets in a slump, the region’s leading exporters may struggle to maintain the recent run of export-driven growth.  Meanwhile, the peripheral economies that have been the star performers in Europe in recent years appear to be running into trouble.  For example, the British economy has consistently grown at a faster pace than most of its West European peers, but the British economy appears headed for a sharp slowdown in the wake of the British decision to withdraw from the European Union.  Spain too has been a star performer in recent years, but its economic growth rates are forecast to fall significantly as well over the next two years.  As such, Europe will find it hard to find new drivers of economic growth in the coming months as the key drivers of growth in recent months are all in serious jeopardy.  This suggests that the European economy is headed for another slowdown, although, for now, yet another recession appears to be unlikely.