8 August 2019

Big Trouble for the European Economy

For Europe, the past few months have brought a wave of bad news that suggests that the region’s economy is falling back into a period of higher volatility and lower growth.  Of course, issues such as Brexit and immigration have been dominating the headlines in Europe during this period.  However, this has overshadowed the fact that economic growth in Europe has been slowing for the past year.  

In fact, if one extends their view to encompass the past couple of decades, it becomes clear that Europe is still in the midst of a prolonged struggle to generate significant economic growth.  Worse, the economic data that has come out of Europe in the past few months suggests that the economic situation in Europe could become much worse over the remainder of this year and in 2020.


A Disappointing Second Quarter

So far, the economic growth data for the second quarter of this year that has been released in Europe have been worryingly poor.  For the 28-member European Union, economic growth slowed to 1.3% on a year-on-year basis in the second quarter.  For the 19-member Eurozone, growth was even lower at 1.1% during this period.  Both of these results represented the lowest level of economic growth in Europe since 2013, when Europe was pulling out its third recession in quick succession.  

Meanwhile, those individual European economies that have already released their economic growth figures for the second quarter have generally had disappointing results.  For example, the French economy expanded by just 1.3% in the second quarter, despite the reforms enacted in that country over the past two years.  Worse, Italy recorded no growth in the second quarter as it remained the world’s worst-performing large economy.  Growth levels were also disappointing in European countries that had been growing above the regional average, such as Spain and Sweden.  Meanwhile, major economies such as Germany and the United Kingdom are being buffeting by their worsening external situations, preventing them from maintaining the levels of growth they achieved in previous years.


Long-Term Malaise

If this latest downturn in Europe were only cyclical it would be a lesser cause for concern.  However, given Europe’s economic performance over the past two decades, it is clear that the European economy is facing some serious long-term problems.  For example, even as the European economy was generating steady growth in the years that followed the post-financial-crisis turmoil, this growth was little more than 2%, with only a small number of European economies able to generate significantly higher levels of growth than this.  

In fact, over the past decade, the European Union has recorded average annual economic growth of just 1.1% per year, while the Eurozone has managed to grow at just 0.8% per year.  Over the past two decades, these economic growth figures are 1.8% for the EU and 1.5% for the Eurozone.  Of course, most developed economies have recorded lower rates of economic growth over the course of the past two decades as growth has shifted to emerging markets, but Europe is growing at an even slower pace than most other developed economies.  In fact, there are concerns that Europe’s long-term economic situation is beginning to mirror that of Japan, a country that has been mired in a period of stagnation since 1992.


A Worrying Outlook

Looking ahead, it appears likely that economic growth in much of Europe will remain very weak over the remainder of this year and into 2020.  For the European Union, economic growth is forecast to slow to 1.2% this year and 1.0% next year, with growth even lower in the Eurozone.  As has been the case over the past two decades, Italy will remain Europe’s worst-performing large economy and it could yet fall into another recession later this year.  Germany, the region’s largest economy, will also struggle to generate growth as its export-dependent economy is battered by weakening external demand and the impact of the trade war between the United States and China.  France will muddle along over the next couple of years as it struggles to boost its competitiveness.  Meanwhile, the two countries that have been the key generators of growth in Europe over the past 25 years, the United Kingdom and Spain, both will record lower rates of growth, with the UK’s outlook remaining muddled due to the uncertainty surrounding its withdrawal from the EU.

For Europe, the key economic question of the coming years will be whether or not the region is doomed to follow Japan’s path of long-term economic stagnation, as Europe and Japan both face many similar problems such as demographic decline and the inability to compete in many high-tech, high-growth industries.  Within Europe, domestic growth is expected to remain constrained as the region’s declining working-age population puts a ceiling on internal growth. Therefore, European economies will have to improve their export competitiveness if they are to avoid the stagnation trap.  

To do so, European countries and businesses will have to invest much more in high-tech and high-growth sectors that are increasingly being dominated by the United States, China and a few other countries.  If this fails, the lesson from Japan is clear.  Without higher levels of competitiveness and a stronger presence in high-growth sectors of the economy, economic growth will remain very sluggish and threats such as deflation will follow, trapping Europe in a prolonged cycle of low rates of growth.