European economies take off
When the flash estimates of Q1 European GDP growth numbers start to appear in about a month’s time we could be in for a pleasant surprise.
Growth in 2017 was reasonable by European standards. The EU, as a whole, grew by 1.9%, higher than the USA (and the UK). This was evenly distributed at around ½ % a quarter. If business surveys are anything to go by this is about to leap. Recent surveys have painted a very positive picture and Eurostat’s Economic Sentiment Indicator (which has the broadest coverage of them all) registered its highest value in March since October. Nor was this a one off. Q1 as a whole was the best result since Q3 2007.
The relationship between business surveys and GDP growth is good but not precise. Nonetheless, recent surveys are consistent with a leap in quarterly GDP growth in the EU from ½ % in Q4 to 1% or possibly more. This is all the more remarkable because only a few months ago forecasters were talking about weaker growth. The argument was that the fall in commodity prices which had cut inflation and boosted real earnings was over and that this would limit future growth. Add in a bit of political uncertainty and weaker growth was definitely on the cards. They were right about higher inflation but it has not stopped growth taking off. So what has happened?
One thing to appreciate is that this is not just a European phenomenon. Growth has picked up globally, but there could be specifically European factors at play too. Real earnings may be being squeezed but high employment growth has maintained aggregate income and consumer spending growth. Better job prospects are also boosting consumer confidence. Interest rates remain low and exchange rates are very competitive. Banks also appear to be playing their part. After a long period of struggling to recover from the financial crisis they appear to be functioning better and able to supply the funds needed to promote growth.
Source: Eurostat, Markit, CBRE
The Eurostat survey does not just give us an idea of what is happening at the aggregate level. The chart (figure 1 above) shows country by country results calibrated by CBRE so that the relative height of the bars is indicative of the relative strength of economic growth (other than that the numbers don’t mean anything in particular). The bars show the average of the past three months (in red) and the average for the same period in 2016 (in blue). A number of things stand out:
All countries except Ireland are doing better than a year ago (and Ireland is still doing pretty well). Even Greece appears to be contracting less sharply
Central European countries stand out at the top of the growth league but a handful of Western European countries, including the UK and Germany, are also managing to b at the average.
As mentioned earlier, surveys do not always translate into hard economic growth but the signs are promising and the recovery is widespread.
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