by Thomas Cooley, and Charlie Nusbaum, and Peter Rupert
The European Union finished 2017 strong with GDP growing at an annualized rate of 2.4% during Q4 and 2.6% throughout 2017. The Euro Area performed slightly better with a year-on-year growth rate of 2.7%. Both regions outperformed the United States, which grew by 2.5% during 2017. Moreover, 2017Q4 remained largely on par with 2017Q3, though with a substantial increase in gross fixed capital formation. Whereas fixed capital formation decreased at an annualize rate of 0.80% during 2017Q3, it rebounded during 2017Q4, growing by 3.6%.
Romania and Slovenia continued their impressive performance for the year, boasting GDP growth of 7.0% and 6.2% since this time last year, respectively. 2017Q4 was the weakest quarter of the year for Romania, however, growing by only 0.6% during the quarter. While lackluster when compared to a high of 2.4% during 2017Q3, it remained on par with the EU28 during the fourth quarter. The big losers for 2017, on the other hand, are the United Kingdom, Denmark, and Norway. Even Italy, with all of its problems detailed in previous posts, edged out these three countries. Also of note, is that the fastest growing economies tended to be those in the East whereas the slower growing economies resided in the West. While the North-South divide has long been recognized, perhaps an East-West divide is also beginning to emerge.
All EU member nations increased investment as measured by fixed capital formation except for Ireland and Luxembourg, which decreased investment by 41% and 13.5%, respectively. These countries have been omitted from the above map. Here again, we see that the Eastern EU nations dominated. Greece and Cyprus were the standouts among this group, boasting fixed capital formation growth of 28.9% and 53.9%, respectively. Hungary, Lithuania, Latvia, and Slovenia each increased fixed capital formation by 11%-16%.
The large increases in fixed capital formation are a good sign for these Eastern countries given that only Hungary and Cyprus have exceed investment levels seen prior to the Great Recession. In the case of Cyprus, 2017Q4 is the first quarter in which this has been the case- it remains to be seen whether this is a “one-off” or indicative of the start of a longer term trend. Moreover, despite the sharp declines seen in Ireland and Luxembourg, they remain above fixed capital formation levels seen during 2008Q1.
Net exports again boasted strong growth during 2017Q4 in Western and Northern Europe, with numbers ranging from 4% in Portugal to 16% in Germany. Moreover, Ireland, Belgium, and Finland continued to lead the pack in this regard, improving their trade balance by 122%, 92%, and 72%, respectively, relative to 2016Q4. Clear exceptions to this pattern are the United Kingdom, Norway, and Sweden, all of which saw their trade balance worsen. Of these countries, Norway faired the worst with negative net export growth of 25.5%. The Eastern EU members continued their long run trend of a worsening trade balance. Overall, however, the EU28 improved their trade balance by roughly 26%.
Unemployment among the EU28 continued to decline through the end of 2017, decreasing by 0.2 percentage points from 7.5% to 7.3%. Over this same time period, however, the unemployment rate in the United States remained steady at roughly 4.1%. Portugal saw the largest drop, with unemployment falling from 8.8% to 8.1%. Iceland, part of the European Free Trade Agreement, was the only country that saw an uptick in unemployment, albeit a modest change.
Despite the improvement, Spain and Greece still have a long way to go to catch up with the rest of the EU28 in this regard. Indeed, Spain’s unemployment rate during 2017Q4 was 16.6% whereas that in Greece remained just above 20%.
During 2017, public debt levels as measured by the debt to GDP ratio continued to stabilize, and in some cases, continued their decline. Portuguese, Italian, and Greek fiscal policy remains worrisome in this regard with debt to GDP ratios well above 100%. With an aging population and increasing dependency ratios, increased tax burdens on the working population will no be sufficient to begin paying down this debt.
Despite this fact, however, the EU has been moving in the right direction throughout 2017. Since this time last year, growth in many member nations has outpaced that in the United States, a fact reflected in global currency markets. Many EU nations indeed have quite a bit of moment heading into 2018. While several areas detailed above remain a concern, these numbers in conjunction with the overall trajectory of the EU28 and EA19 reaffirm the ECB’s conservative optimism in its decision to hold interest rates steady (here).