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Economy in Brief

EMU GDP Gains at a Very Slow Pace...and Is Slowing
by Robert Brusca  February 14, 2020

GDP growth in Europe is slowing. In Q4 2019, GDP in the EMU slowed to an annualized gain of 0.2%, down from 1.1% in Q3. GDP slowed quarter-to-quarter in the EMU as well as in six of the eight EMU countries listed in the table. GDP also slowed in Denmark and the United Kingdom. Among EMU members, only Portugal and Spain grew faster in Q4.

The year-over-year growth rate for GDP in Q4 2019 also was slower; it decelerated from its year-over-year pace in Q3 2019 for all of the EMU and for all EMU countries in the table except Portugal. Over the three previous quarters, the quarterly slowdown was less of a phenomenon.

However, the slowing phenomenon is extensive. In Q4 2019, the EMU and six of eight of the countries in the table show GDP growth weaker on a fourth-quarter-to-fourth-quarter basis compared to the same metric in Q4 2018. In 2018, all the EMU countries in the table as well as the EMU overall saw GDP growth rates over four quarters lower than they were just four quarters ago. In 2017, however, GDP had accelerated in the EMU to a Q4/Q4 pace of 3.0% in the fourth quarter. Only two EMU members in the table, Finland and the Netherlands, had weaker growth over four quarters than they had four quarters previous to that. So the slowing in GDP viewed broadly has been in place for about two years and it appears to still be in train.

Assessing growth since the Great Recession period from late-2009 onward, we find anemic rates across the board. The U.S. pace of 2.3% is poor for a pace that dates to the end of the Great Recession and includes ‘economic recovery’ rates the stepped up pace of growth usually seen as an economy emerges from recession. The U.K. manages 1.9%. EMU manages only 1.4% with Germany matching the U.K.’s 1.9% pace. The recession and financial overhang hit Europe later, so I show a second array of growth rates from 2013 onward. From that date, Europe’s growth shows faster rates except for Germany. Still, only Spain and Portugal notch rates in excess of 2% - along with the U.S. on that period when U.S. and European and growth synchronize.

The longer growth period back to 1990 (or to 1995 for the EMU, Portugal, Greece and Spain) shows stronger growth rates compared to the rates calculated since Q3 2009 (except for Germany). Of course, Germany was undergoing the stress of absorbing East Germany and that affected its performance. For Italy, Portugal, Spain and Greece, being under austerity affected their performance after the Great Recession as the European Commission began to get tough.

When we look at GDP over the recent past and over various historic periods, it is clear that the potential for Europe and the U.S. to grow is limited. These economies simply are not able to create GDP the way they once did. Italy is still recovering from its period of austerity. It still has more work to do on its banking sector and it has a shrinking population to contend with. With new conflicts in Syria, there could be another wave of migrants/refugees spilling across the Mediterranean that Europe will have to deal with.

All of this complicates the job of monetary policy in Europe. Both Europe and the U.S. have transitioned into a period where economic growth potential is much less than it used to be. Some politicians still try to set their sights on much stronger growth performance, such as Donald Trump in the U.S. But the sorts of growth rates they speak of are simply out of reach unless someone learns to unlock a productivity miracle. And that simply has not happened. In the U.S., even the Trump corporate tax cuts and allowing the expensing of investment have not been powerful enough incentives to cause investment and productivity to step out. As Europe begins to rethink what monetary policy can –and can’t- do, it will also be aware that what can be expected of the economy is less. Still, judging from unemployment data, and learning from the U.S. experience, Europe would seem to have more room to push growth higher than the U.S. where the unemployment rate hovers near a 50-year low.

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