Interpreting Europe’s Q3 2014 Economic Results

While economic growth in the European Union remained relatively weak in the third quarter of 2014, it was not as weak as many economists had expected.  For the 28-member European Union, GDP growth remained steady at 1.3% on a year-on-year basis (0.3% quarter-on-quarter).  As for the 18-member Eurozone, GDP growth was slower at 0.8% year-on-year (0.2% quarter-on-quarter).  While these growth rates are well below those of most of the world’s other leading economic regions, there had been fears that economic growth rates would have been even lower in the European Union in the third quarter.

Much of the focus on the European Union economy in recent months has been on Germany, which had been on the brink of falling into a recession.  However, the German economy managed to post positive growth in the third quarter (1.2% year-on-year), despite a run of bad economic news in recent months.  Meanwhile, the Eurozone’s second-largest economy, France, also performed slightly better than expected, growing by 0.4% year-on-year thanks to a surge in government spending.  In Spain, the government’s economic reforms continued to bear fruit as its economy grew by 1.6% year-on-year in the third quarter.  In contrast, the Italian economy remained mired in what is now a 15-year slump as it contracted by 0.4% year-on-year in the third quarter.

Europe’s faster growing economies are found on the periphery of the European Union.  First and foremost, Great Britain continued its strong economic recovery as its GDP growth rate was 3.0% year-on-year in the third quarter.  This was due in large part to Britain’s strong services sector and its ability to attract foreign investment from outside of Europe.  Central Europe’s leading economies, led by Poland, also continued to record healthy rates of growth in the third quarter, despite the lingering weaknesses in many of the region’s key export markets.  Finally, Greece managed to record its first substantial economic growth in the past six years, as that devastated economy expanded by 1.4% year-on-year.

While European leaders breathed a sigh of relief that the economic results for the third quarter were not as bad as had been feared, there are many factors that continued to prevent a stronger recovery from taking hold in this region.  First, Europe’s domestic demand levels remain five percent lower than they were in 2008 as nearly all of Europe’s economic growth has been generated by exports.  Second, deflationary pressures remain firmly in place in the Eurozone, with many economies already facing actual deflation.  On a positive note, the recent sharp depreciation of the euro is welcome news for the region, as it will help to boost export competitiveness for the Eurozone, helping to offset the continued weakness of the region’s domestic markets and potentially holding back deflationary pressures.  Altogether, economic growth in the European Union is forecast to rise in late 2014 and early 2015, albeit at a very sluggish pace due to the poor state of the region’s domestic markets.