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Thursday, February 14, 2013

Tackling the slow, painful decline: A bad day of economic data for the eurozone

Some have said the worst of the eurozone crisis is over – this morning’s economic data did not provide much support to their argument.

Top of the list are the growth figures for the eurozone in Q4 2012 – as a whole the bloc contracted by a massive 0.6%. Maybe not a huge surprise but still worse than most expected. Furthermore, there were few glimmers of hope. 

As the graph above shows, Germany posted a contraction of 0.6%, Italy 0.9% and Portugal a massive 1.8% (more on this in a minute). France’s 0.3% contraction looked relatively mild, although it confirmed that the French economy saw zero growth in 2012 – it also put pay to any hopes of the French government achieving its growth projections for 2013 or its deficit target (see here for more on this). For all of these countries, this was the worst quarterly growth performance in almost four years (2009Q1).

The Italian statistics agency confirmed that growth for 2012 was -2.2%, a timely reminder of Italy’s real problem – an endemic and chronic lack of economic growth. The absence of any credible policy for correcting this in the current electoral campaign should be of grave concern to all of Europe.

Portugal was undoubtedly the stand out performer, but not in a good way. The 1.8% contraction in the final quarter brought the annual real terms contraction in 2012 to 3.2%. This result, along with the German contraction (which was put down to a collapse in European demand for German exports), highlights the substantial risk of expecting export lead recoveries to materialise when the entire eurozone is in a recession. The stumbling growth in the US and China at the end of 2012 likely created a further drag.

In fact, the only countries to provide any strongly positive data were the smaller central and eastern European economies – particularly Estonia, Latvia and Lithuania. Some would highlight that these are the countries that have already completed a significant round of structural reforms and internal devaluation. In any case, they are far from large enough to help pull the rest of the eurozone out of its current slump.

Meanwhile, the Greek statistics agency Elstat also released its figures for Greek unemployment in November 2012. Overall unemployment reached 27%. As we have noted many times before, this far outstrips the EU/IMF/ECB troika estimate for the end of 2012 which was 24.4% (this is even after it was revised upwards significantly in the IMF’s January report on Greece).

More worryingly though, youth unemployment has reached a whopping 61.7%. Think about that figure - it's absolutely extraordinary, especially when compared to the fact that it was only 28% three years ago. We can’t help but wonder how long such high levels of unemployment can be sustained before the political and economic impact becomes too heavy for the state to carry alone (i.e. before Greece demands further eurozone funding and concessions on its reform programme). Again, the risk is that the very fabric of Greek society could start disintegrating under such sustained pressure.

There has been plenty of optimism around the eurozone recently, some of it warranted and we should relish this. But this data should be a timely reminder of, arguably, the biggest challenge of them all for the eurozone: how to reverse the trend of slow, grinding decline.

If EU leaders thought for one minute that there were room for complacency, they can think again.


Rik said...

The only larger part of the EZ that could pull the economy of the ground is Germany. And it looks like that aint going to happen.
Looking at Merkel's own economic policies they were/are nearly as appaling as those of the rest.

She simply has been lucky mainly becuse the German economy is for a large part based on the sector that did much better than the other ones: the hitec industry.
Look at the rest:
-not tackling costwise aging;
-want to increase entitlements (to get reelected);
-discussion ober stating with a minimum wage;
-unable to get back to a surplus iso of a deficit even with 3% growth of GDP;
-now proposes taxraises for large companies.
If you look at above list it looks Hollande or Milliband, but it is Merkel.
With as difference thet Germany can probably afford these things,for the time being.

Anonymous said...

"The worst is over". Olli rehn two years ago...

Anonymous said...

"The absence of any credible policy for correcting this in the current electoral campaign should be of grave concern to all of Europe."

Italy's economic straits are its own business. It is a sovereign nation.

And there is no such political entity as "Europe," and OpeEurope does its readers a disservie by constantly -- and for pro-EUSSR purposes -- insidiously reinforcing the notion that there is.

Rik said...

Nearly all official forecasts are rubbish and this is likley to be another one.
1. They work with the same models as before (in much shorter cycles). Which simply not work here. Cycle is much longer so downturn and therefor time required for recovery. That is if you want to look incycles. Anyway if seen as a correction it works more or less similar.
2. Several models even miss the deleveraging. Last 1-2 decades basically all growth can be explained by either the private sector or the government borrowing more than would be sustainable seen GDP growth. There was likely some room for overborrowing, but not that much and not that long. This is now reversed/corrected. Leading to less government expenditure and less consumption. Working with a simple multiplier for the overborrowing is easiest. Which also gives you a heartattack because how much the Western economies have grown without that overborrowing stimulus (hardly anything).
Another way to look at it is seen that the economy has been on steroids and now has to go cold turkey. Question being where should you start from the bubblephase or a corrected one?
3. What you do see is first people extend spending on durables and investments. After some time there is a catch up effect. However this effect is nowhere near big enough to get the economy going again.

What works better is see where new growth should come from. Divide into 3 or 4 (seen export/or export minus import as a seperate item) sectors.
Add say 1% after 2-3 year for the catch up (for roughly 1 year or so).
-Government will cut (zero growth at best);
-French consumers (will not spend more, confidence is extremely low and incomes are not rising but taxes are), leading to some negative growth;
-business. Like Spain nobody is investing and foreign investors are running for the door. Probably exports slightly up and imports down (if you put that here, could be seperate or spread over all 3 other sectors, but you have to be consistent and correct when necessary, so you got everything but nothing double). Zero growth at best.
Overall leading to some negative growth. Catch up is not even happening in Germany now and France is always behind so nothing to add from there.

This has given much better results than the standard models used by IMFs and ECBs. It cost them too much time to come up with other ones. And their very weak point they never explain like here where the growth should come from.
In this crisis if you cannot see where growth should come from it is very unlikley to happen.
Good thing you can judge official figure in 5 minutes or so this way.
Can make a similar model on productivity an size of the labor force. Compare the 3. But always keep asking where does the growth come from. With all these estimates it is mainly from the formula used not from real life. Difficult to get data a lot comes indirectly from GDP stuff. Which is as said most likley not accurate.

christina speight said...

Open Europe's "we should relish this" relating to some nebulous undetailed g:good news" is absurd.

The Euro is crippling not only the eurozone - it's doing that massively - but also those on the periphery and World Trade in general. It should have been abandoned years ago but even now would be better for all than continuing with the farce.

Over the gates somewhere in Brussels should be inscribed "Abandon hope all ye who enter here" for there is NO HOPE from the Greeks, Spaniards, Portuguese, Italians and - er - the French.