The State of the European Economy
After three recessions in less than five years, the European economy was battered and bruised earlier in this decade. However, a depreciation of the euro and other European currencies between 2014 and 2016, an improvement in the external economic climate, and a series of needed economic reforms in many European countries, have all combined to improve Europe’s economic performance in recent years. By 2017, Europe’s economy, bolstered by strong export demand and a number of stimulus measures from the region’s governments and central banks, was in a stronger position than at any time in the past decade. Now, with some of these stimulus measures being withdrawn and with the euro and other regional currencies having regained some of their value, Europe could be on the verge of a gradual slowdown, one which may have already begun. On the positive side, domestic demand in Europe remains stronger than it has been at any time in recent years, boosted by the region’s falling unemployment rates and rising wages. However, Europe’s recent export boom may slowly come to an end, particularly if the region’s export competitiveness continues to erode in the coming months. Overall, Europe appears likely to continue to record decent rates of economic growth, even if this growth slows gradually in the months ahead.
As expected, economic growth rates trended slightly downwards in the fourth quarter of last year. For the 28-member European Union, growth slowed to 0.6% quarter-on-quarter (2.6% year-on-year) in the fourth quarter of 2017, while growth for the 19-member Eurozone also slowed to 0.6% quarter-on-quarter (2.7% year-on-year). As a result, growth for the European Union and the Eurozone was 2.5% for the year in 2017, the highest rate of growth for both groups in a decade. Furthermore, this growth compared favorably with that of other developed economies, most of which had been growing at a much faster rate than Europe in previous years. For example, 2016 and 2017 represented just the second time in the past 25 years that the rate of economic growth in the EU exceeded that of the United States in back-to-back years. In fact, 2017 proved to be a better year than expected for many of Europe’s leading economies, providing a much-needed boost in confidence for a region that had suffered so many setbacks and crises in previous years.
One of the most interesting highlights of Europe’s recent economic performance has been the different directions in which some of the region’s leading economies are headed. For example, no economy in Europe had contributed more to the region’s overall economic growth since the 1990s than the United Kingdom. However, the fact that the British economy is in a different stage of its economic cycle than the rest of Europe, combined with the uncertainty surrounding Britain’s withdrawal from the European Union, has resulted in the British economy underperforming its continental counterparts over the past 18 months. In contrast, economies that had previously been mired in a long period of stagnation, such as Italy, France and Portugal, all recorded higher rates of growth last year, due to a combination of long-delayed economic reforms and an improved external situation. In the meantime, economies such as Germany, Spain and the Netherlands continued their recent run of solid growth, each benefitting from strong export demand, both inside and outside of Europe.
As Europe looks ahead, there are a number of reasons for optimism regarding the European economy. First, the European domestic market, which has been depressed for nearly a decade, is stronger now than it has been in a long time. Furthermore, wages are forecast to rise across much of Europe, while the region’s persistently-high rate of unemployment continues to slowly, but surely, trend downwards. Add to this the expectation that demand in many of Europe’s key export markets, such as those in North America and Asia, will remain strong over the coming year, and it is easy to see why more growth is forecast for the European economy. At the same time, many of Europe’s worst performing economies (such as Italy and France) have enacted reforms that should boost their competitiveness in the coming years.
On the other hand, there are also a number of reasons to believe that growth in Europe has peaked and will begin to trend downwards in the coming months. First, Europe’s recovery was the result of the region’s improved competitiveness that resulted from the depreciation of the euro and other regional currencies in 2014. Now, with the region’s currencies having strengthened significantly over the past year, there are concerns that export growth will slow sharply this year. At the same time, Europe’s growth ceiling is held down by the region’s demographic decline, and unless productivity levels in Europe rise sharply, the region’s ability to generate higher rates of economic growth will be limited by labor shortages, inflationary pressures and other such factors. Overall, while Europe’s economy is expected to slow slightly this year, the region’s economic health is still much better than it has been at any point in the past ten years, and this alone is reason for optimism.