Weakness Across the Board

Real GDP has declined in all of the European countries shown below for the last quarter of 2012; and, all countries except Germany remain below the level of real GDP five years ago. German real GDP declined after relatively solid growth over the past several years.  Real GDP in Spain and Italy is now actually lower than it was at the depths of the recession in 2009-2010.

Real private consumption expenditures have collapsed in Italy, Spain, and the Netherlands-about 6% below where they were in 2008. Capital formation has also seen a disheartening decline in all countries except the UK. While Germany had seen a comeback in gross capital formation, getting back to its 2008 pre-recession level in the middle of 2011, German capital formation is now 10% below that level.

Despite contracting output across the Eurozone economies, there are no signs of (increased) turmoil in labor markets. The unemployment rate for Germany, Italy, and the UK maintained a slow downward trend. Spain’s unemployment rate decreased for the first time since the peak of the cycle. France and the Netherlands maintained a slow upward trend.

Spending Differences of Government

Government spending in both Italy and Spain have fallen considerably as has the U.S. In most of the other countries government final consumption expenditures continue to rise. However, as a fraction of GDP, government expenditure is approximately flat, except in the U.S., where it is falling and is now below its level since the previous peak.

One of the remarkable features of the current economic distress that began in late 2007/early 2008 is the extent to which the initial collapse was common across economies (including the U.S.) in both timing and severity.  What is not common is the path of recovery as the following analysis shows. The U.S. now looks to be in good shape compared  to many of the E.U. economies…most of which have slipped back into negative growth. For the E.U. as a whole it is the second consecutive quarter of decline in aggregate real output. The business cycle dating committee of the Center for Economic Policy Research -CEPR- has declared that the Eurozone Economy slipped back into recession beginning in the 3rd quarter of 2011.  Oue analysis focuses on the largest European economies including the U.K.

E.U. Growth Slows Compared to the U.S.

Many of the economies in the EU continue a decline in GDP  that started in late 2011. These economies reached a nadir about 6 quarters after the recession began in 2008, then grew for about 6 quarters, stagnated, and have been  in various rates of decline for 6 quarters or so. Moreover, none of the countries in the EU in the graph shown below has come back to its 2008 peak, except Germany. Indeed, the only positive signs are the Germany continues to grow and the U.K. has turned up a bit.  It is far too early to suggest a U.K. turnaround given that they remain well below their previous peak.

Consumption continues to collapse in all but Germany and France where it has remained stagnant.  More alarming is the complete collapse in capital formation. Only the U.K. shows a possible recovery in capital formation after a dramatic decline.  Even more dramatic is the decline in residential capital formation. The total collapse in Spain is well understood but, except for Germany, it is remarkably weak everywhere.

One of the few bits of encouraging data is the recovery of exports in several of the most impacted economies. Spain in particular has had robust export growth as have Germany and the Netherlands.  Imports have recovered in Germany, the Netherlands, and France.

Welcome to our Snapshot of the European Economies. As with our U.S. Economic Snapshot we present the salient features of the business cycle in Europe in a way that we find informative.  In this post we compare recovery paths of  the major European economies as they try to rebound from the recession that began in 2008. This is the most pressing issue facing European policy makers, central bankers and other economies around the world.  In subsequent posts we will look at labor markets in Europe, and we will present more detailed comparisons across business cycles for individual economies.  In the page referred to in the heading above we discuss the problems of identifying European business cycles given the data limitations. One of the remarkable features of the current economic contraction that began in 2008 is the extent to which the initial collapse was common across economies (including the U.S.) in both timing and severity.  What is not common is the path of recovery as the following analysis shows.

The Gap Grows In Europe

The figure below shows the available consistent time series for real GDP that are maintained by Eurostat. The short length of some of the series indicates why within country cross-cycle comparisons are challenging. But the data make clear that the timing of the current cycle is common to all. The peak occurred in the first quarter of 2008 and the trough of the contraction was in the second quarter of 2009.

Following the contraction, Europe has been a tale of haves and have-nots. The following graph plots the percentage change in Real GDP for several EU countries from the peak of the previous business cycle. It underscores how different the recovery has been for many of the economies. For instance, Germany experienced one of the most severe contractions with real GDP falling more than 6% from the peak. The German recession was just as severe as that in Italy or the U.K. Subsequently, Germany has had a robust recovery while Italy and the U.K. both have recovered very little and both are again in decline. Spain is on the verge of falling below its previous trough. France and the Netherlands did not contract as much as the other countries and initially showed signs of a V shaped recovery. In recent months they too have faltered as the problems of Europe weigh on their economies.

It is worth comparing the U.S. recovery to the recovery in Europe. In the figure below the U.S. is depicted in the heavy blue line. U.S. GDP did not fall as much as in Germany or the U.K. or Italy but the recovery has been similar to the German recovery.

Looking at the recoveries from the trough shows much the same message. Spain continued to contract a bit after 2009 Q2 and only Germany has had a robust recovery.

Consumption has collapsed badly in many of these economies as has capital formation. The following figures show that consumption has recovered only in France and Germany and that capital formation has not attained its previous peak in any of the economies. Even more dramatic is the decline in residential capital formation. The total collapse in Spain is well understood but except for Germany it is remarkably weak everywhere.

One of the few bits of encouraging data is the recovery of exports in several of the most impacted economies. Spain in particular has had robust export growth as have Germany and the Netherlands.  Imports have recovered in Germany the Netherlands and France.

The Role of Government

The Great Recession that began in 2008 had a common trigger in the paralysis of the world financial system caused by the build up of systemically risky debt on the balance sheets of financial institutions and the enormous cross border flows of risky debt. But the proximate circumstances of countries varied a lot. Some, like Spain, the U.S. and Ireland had collapsing housing bubbles and a massive build up of private debt. Others, like Italy, the U.K., and Greece had large outstanding stocks of government debt. The initial response of the governments was quite different. The figure below shows the response as measured by the percentage change in government consumption from the peak of the cycle to the present. This essentially captures the level of Government spending.

The percentage change in government spending measured as a percent of GDP is depicted below the levels. This reflects both the level of government consumption and the decline in GDP.

Finally, we plot the change in government indebtedness in response to the crisis.