European Affairs

Overall, Europe’s economy, as measured by growth in the gross domestic product (GDP) of the 19-member currency union, expanded by 0.3 percent in the quarter ending in September, or a 1.4-percent annual growth rate, Eurostat reported.[1]  The IHS Markit’s purchasing manager’s index (PMI, covering output, hiring, inventories, and expectations) hit 53.5 in October, the highest since January 2014, with manufacturing expansion in Europe’s largest economy, Germany, the driver.[2]

GROWTH RATES IN EURO-ZONE, EUROPEAN UNION, 4Q 2015 – 3Q 2016

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Source:  Eurostat.  http://ec.europa.eu/eurostat/documents/2995521/7724727/2-31102016-BP-EN.pdf/f6aeedd4-c57b-400c-988d-9c0fd90eaf95 .


COMPARISON OF GDP AND PURCHASING MANAGER’S INDEX, 1999 - 2016

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Source:  Chris Williamson, “Eurozone flash PMI signals solid start to fourth quarter.” IHS Markit, October 26, 2016.  http://www.markit.com/Commentary/Get/26102016-Economics-Eurozone-flash-PMI-signals-solid-start-to-fourth-quarter?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+MarkitPMIsAndEconomicData+%28Markit+PMIs+and+Economic+Data%29 .


PURCHASING MANAGER’S INDEX FOR INDIVIDUAL EU COUNTRIES, OCTOBER 2016

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Source:   Mehren Kahn, “Eurozone manufacturing growth soars to three-year high – Markit.” Financial Times, November 2, 2016. www.ft.com.


What makes the PMI reading an eye-opener is the factors that resulted in the measure’s rise, according to IHS Markit, a provider of economics data and analysis.  “Backlogs of work (orders received but not yet completed or started) accumulated at the fastest rate for over five years, meaning business activity growth and hiring look set to accelerate further as we head towards the end of the year,” writes Chris Williamson, the chief business economist at IHS Markit.  “Other encouraging forward-looking signals were higher inflows of new orders, increased job creation and busier supply chains, as well as signs of some companies moving away from cost-cutting inventory reduction policies towards restocking. The amount of inputs bought by manufacturers for use in production showed the largest rise for over two-and-a-half years.” [3] 

Inflation, too, continued to show signs of steady increases with consumer prices over the past year through October up 0.5 percent, a slight rise from the previous month (0.4 percent). The rate of inflation is key because it is the official target partly determining the future of the unprecedented package of monetary expansion and debt repurchases by the European Central Bank. That target is close to, but below, 2 percent. ECB President Mario Draghi recently committed to sustaining the stimulus package through March, and even longer, if the need persists. The December 8 meeting of the ECB Governing Council on monetary policy is seen as the point when a decision will be made — albeit one with sufficient hedging likely — on when and how to start “tapering.”

From the data released so far this year, the emerging outlook suggests: slow-to-moderate growth ahead in the year or longer; the importance of the strength in the United States — as the Eurozone’s largest market — as the locomotive for Europe’s economy; the key role that “cheap money” from negative interest rates has had in expanding credit and thereby stimulating growth; the clouds overhead from European banks’ difficulties in surviving with negative interest rates, which resulted in losses in lending activities, and both sovereign debt and nonperforming-loan burdens; and, whether Europe can “shrug off” Brexit, the migrant crisis, and the insurgence of right-wing upstarts (what Jean-Claude Juncker, president of the European Commission, called “galloping populism”).

There are endless debates over whether “mature” economies such as the United States and Europe can have strong economic growth in the decades ahead, that the more likely scenario is a cycle of tepid to moderate expansion followed inevitably by a slowdown. With an aging population, consumption will drain savings as demand shifts away from the large-scale purchases such as housing and automobiles to medical and other healthcare products and services. Economic growth also suffers as public spending shifts from education and infrastructure investment to financing programs for the elderly.[4] The emerging baby boom is insufficient to offset this dynamic.[5]

Aging, too, “will take a considerable toll on productivity growth over the medium- to long-term,” according to IMF researchers.[6] Further, “the burden of workforce aging will fall unequally across euro-area member states,” the researchers wrote. “Worryingly, some of the largest adverse effects on productivity will fall on countries that can least afford it, such as Greece, Spain, Portugal, and Italy. These countries already have elevated debt levels and meager fiscal space, and need rapid productivity growth to build competitiveness and bring down unemployment.”


WORKING-AGE POPULATION GROWTH BARELY MATCHES RETIREMENT-AGE POPULATION INCREASE

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Source:  Luis Enriquez, Sven Smit, and Jonathan Ablett, “Shifting tides: Global economic scenarios for 2015–25.”  McKinsey, September 2015.  http://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/shifting-tides-global-economic-scenarios-for-2015-25 .


BURDEN OF AGING VARIES THROUGHOUT EUROPE

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Source:  Shekhar Aiyar, Christian Ebeke, and Xiaobo Shao, “The Euro Area Workforce is Aging, Costing Growth.” IMF, August 17, 2016.  http://www.businessinsider.com/imf-research-on-the-impact-of-the-old-people-in-the-workforce-2016-8 .


While the overall trend in Europe looks promising, there are the counterweights of struggles in Greece, Spain, Portugal, and Italy.  Seen as the Eurozone’s weakest link, Greece is seven years into its worst decline in post-war history.  While Prime Minister Alexis Tsipras sees growth returning next year, the country will likely need a fourth round of economic assistance after the third lifeline runs out year-end 2018.  But the austerity demands required under the EU debt-relief program may eventually force the government to disband and call for elections in the second half of 2017, overwhelmed by the growing personal debt, declining incomes and higher taxes. 

To the west, Italy has put forward a budget that increases debt, in part to address the emergency relief needed after the recent earthquake and for the ongoing migrant crisis.  That proposal breaks the limits negotiated with Brussels.  Having suffered a triple-dip recession, Italy's economy has shrunk by around 10 percent since 2007.  The latest manufacturing numbers have surprised economists, however, and the outlook for growth is an expansion of 0.8 percent this year and 0.9 percent the next year, according to the most recent IMF World Economic Outlook.[7]  On December 4, Italians vote on a referendum on constitutional changes proposed by Prime Minister Matteo Renzi to limit the Senate’s power so that it no longer can block legislation indefinitely.[8]

Further west, Spain and Portugal.  Despite a political deadlock between the left and the right over the past ten months, Spain's has a three-year recovery stay on track in recent quarters.  Latest growth figures show annual output vacillating between 3.2 and 3.4 percent for the Eurozone’s fourth largest economy.[9]  The unemployment rate is at 18.9 percent, the lowest since the fourth quarter of 2009.[10]  On November 2, the stalemate ended when Conservative Mariano Rajoy was sworn in as the prime minister and formed a minority government.


SPAIN’S ECONOMY, 2013 - 2016

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Source:  Maria Tadeo, “Spain’s Economic Growth Slows as Rajoy Gets Closer to Power.”  Bloomberg, October 28, 2016.  http://www.bloomberg.com/news/articles/2016-10-28/spain-s-economic-growth-slows-as-rajoy-inches-closer-to-power .

SPAIN AND THE PURCHASING MANAGER’S INDEX, 2006 - 2016

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Source: Euronews, October 28, 2016.  http://www.euronews.com/2016/10/28/spain-s-economy-still-growing-but-expansion-slows-slightly  .


Portugal continues to struggle, with growth at roughly one percent this year, and 1.1 per cent in 2017, according to the IMF.

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Source:  Mehreen Khan, “Portugal stuck in ‘vicious cycle’ warns DBRS.”  Financial Times, October 6, 2016.  www.ft.com.

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Source:  Patricia Kowsmann, “Europe Worries Portugal Is Prone to a Debt-Crisis Relapse.”  Wall Street Journal, October 11, 2016.   www.wsj.com.


PORTUGAL’S GOVERNMENT BOND YIELDS EXCEED THOSE OF OTHER EURO-ZONE COUNTRIES

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Source:   Economist, “Adventure tourism:  Weak growth makes Portugal vulnerable again.”  October 15, 2016.  www.economist.com.


What these countries’ experiences show is that economic recovery is not always a straight line but may encounter relapses.  And, the growth cycle may be more one of more fits or starts for mature economies than the booms seen in past decades.

[2]Mehren Kahn, “Eurozone manufacturing growth soars to three-year high – Markit.” Financial Times, November 2, 2016. www.ft.com.
[4]For more discussion about the consequences on government spending, see:  Milena Nikolova, “Two solutions to the challenges of population aging.”  Brookings, May 2, 2016. https://www.brookings.edu/blog/up-front/2016/05/02/two-solutions-to-the-challenges-of-population-aging/ .
[5]“During the period from 2015 to 2080 the share of the population of working age is expected to decline steadily through until 2050 before stabilising somewhat, while older persons will likely account for an increasing share of the total population: those aged 65 years or over will account for 28.7 % of the EU-28’s population by 2080, compared with 18.9 % in 2015. As a result of the population movement between age groups, the EU-28’s old-age dependency ratio is projected to almost double from 28.8 % in 2015 to 51.0 % by 2080 (see Figure 7). The total age dependency ratio is projected to rise from 52.6 % in 2015 to 77.9 % by 2080.”  Eurostat, “Population Structure and Ageing.”  http://ec.europa.eu/eurostat/statistics-explained/index.php/Population_structure_and_ageing .
[6]Shekhar Aiyar, Christian Ebeke, and Xiaobo Shao, “The Euro Area Workforce is Aging, Costing Growth.” IMF, August 17, 2016.  http://www.businessinsider.com/imf-research-on-the-impact-of-the-old-people-in-the-workforce-2016-8 .
[7]IMF, World Economic Outlook.  October 2016.  http://www.imf.org/external/pubs/ft/weo/2016/02/
[8]John Follain and Chiara Albanese, “Europe's Next Unnerving Referendum: QuickTake Q&A.” Bloomberg, October 4, 2016.  http://www.bloomberg.com/news/articles/2016-09-12/it-s-italy-s-turn-to-unnerve-with-a-referendum-quicktake-q-a .  “A proposal to reshape the Senate so that it no longer can block legislation indefinitely, gets consulted on fewer matters and loses its power to call a vote of no confidence in the government. Today’s 315 directly elected senators would be replaced by 100 regional councilors and mayors who are indirectly elected or appointed.”
[9]Reuters, “Spanish economy shows resilience as new government nears.”  Oct 28, 2016. http://www.reuters.com/article/spain-economy-idUSL8N1CY25J .
[10]Tobias Buck, “Spanish unemployment rate below 20% for first time in 6 years.”  Financial Times, October  27, 2016.  www.ft.com
[11]IMF Outlook, op. cit., endnote vii. 
 

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