Has Europe's Economic Recovery Peaked?
After nearly a decade of nothing but bad news and results, the European economy is finally enjoying a spell of relatively strong economic growth, and mostly positive news and results. In fact, Europe’s economic recovery has now lasted for two years, longer than any similar period of expansion since the years before 2008’s global financial crisis. While growth levels today are well below the levels achieved before the financial crisis, they are welcome news for a region that has been battered economically and politically over the past decade. Moreover, the fact that this growth is largely across the board, encompassing most of Europe’s leading economies, is also a welcome development given the crises that have befallen so many European economies in previous years.
As in earlier times, much of this growth has been the result of higher levels of export revenues, as many of the region’s key economies remain dependent upon exports for much of their growth. However, internal consumer and business demand has also risen over the past year or two, providing an extra boost for the region’s economy. The question facing Europe is now, can the current recovery continue, or is Europe doomed to fall back into a period of stagnation that many predicted was its fate not long ago.
So far, the economic data that has emerged in recent months points to the European economic recovery continuing, at least over the near-term. In the second quarter of this year, the European Union’s economy expanded by 2.2% on a year-on-year basis (0.6% quarter-on-quarter), the highest rate of growth in the EU in recent years. Moreover, while many EU member states have yet to release their GDP growth results for the second quarter, it is clear that this growth is being driven by nearly all of the EU’s leading economies. Export-driven economies such as Germany and the Netherlands have benefitted from rising levels of demand in key export markets around the world, as well as the fact that, until recently, the euro was significantly undervalued.
Meanwhile, EU economies such as France and Italy that are driven more by domestic demand have benefitted from rising consumer and business confidence levels in those countries, as well as a strong performance by southern Europe’s tourism sector. At the same time, two economies that had been driving growth in Europe and that were expected to slow this year, Britain and Spain, have both grown at a pace higher than expected in the first half of this year. As such, not only is Europe’s economy growing at a decent pace, but nearly all European economies are sharing in this growth.
For the time being, confidence levels in most European economies are as high as they have been at any time during the past decade. Moreover, the outlook for the European economy in the third quarter remains largely positive, as tourism revenues are expected to bolster southern European economies, while export and domestic demand levels are expected to remain strong in most northern European economies. However, while the near-term looks bright for Europe, clouds are appearing on the horizon that could signal an impending end to Europe’s two-year recovery. First and foremost, the recent strengthening of the euro threatens to undermine the primary driver of economic growth in Europe, exports. Without a weak euro, most Eurozone economies would suffer from low levels of export competitiveness and will struggle to compete with European economies outside of the Eurozone, not to mention exporting-rivals further abroad.
Likewise, growth on the domestic market in Europe is limited by a number of factors, including Europe’s demographic decline and the persistently high rate of unemployment in many of Europe’s largest countries. Meanwhile, many of the industries in which Europe remains highly competitive are under threat from changing technologies, as well as foreign competition in Asia and North America. As such, not only is it unlikely that growth will rise much more in Europe, but it is more likely that growth will begin to slow noticeably in the latter part of this year.
There is little doubt that the past two years of solid economic growth in Europe have helped to restore some of the region’s battered confidence. In fact, apart from Brexit, Europe has enjoyed some of the highest levels of economic stability in the world during this period, something that would have been considered nearly impossible just a few years ago. However, it is also clear that Europe’s economy is no longer capable of producing the rates of growth that it was able to achieve prior to the global financial crisis, let alone the rates of growth that other developed economies outside of Europe are still able to achieve.
In fact, Europe’s near-term economic future probably lies somewhere between the two extremes of recent years, with growth continuing, albeit at a slightly slower pace than that of the past two years. Moreover, while slower growth may be disappointing for some, the fact that Europe is not facing an imminent economic crisis at this point is welcome news for a region that was so desperate for economic stability just a few years ago. After years of turmoil, a little stability goes a long way towards restoring a region’s fragile confidence.