European GDP Turns Higher-But Disappoints

European GDP turned higher in Q3 but the results were generally less than expected. Among the early ‘flash’ GDP reporters France posted a small rise but it was the second rise in a row for France. Greece with always volatile results posted the strongest rise followed by Austria. Italy and The Netherlands have the largest Yr/Yr declines in this group; the EMU Yr/Yr drop is of 4.1%. Greece is lower Yr/Yr by just 1.6% Austria but just 2.2%. Germany the largest e-Area economy is off by 4.8% Yr/Yr even though it has two quarters in a row of solid growth under its belt.

Flash reports do not provide any GDP detail but the various authorities do offer some account of their results. Both Germany and France cited the role of exports in pushing growth ahead. In Germany investment demand was also described as a key factor.

Paragon of strength or parasite of growth? -- An unfolding theme in the Area is that exports, external demand, is driving the European recovery. In France domestic demand was flat in the quarter despite a ton of ongoing stimulus that has left France unable to get its fiscal budget gap in line as soon as the EU Commission wants it to. Hungary, in its GDP release today, complained that exports were weak and that was sapping GDP strength. The largest industrial economies would seem to be good candidates to spur world growth with their own domestic demand instead of relying on the demand increases elsewhere. Chancellor Merkel has defended Germanys ‘right’ to be a leading exporters, Japan always seeks a surplus to ‘defend’ against the country’s lack of oil and dependence on oil and other natural resource imports. China’s trade surplus grew larger last month. How can ‘everyone’ have export led growth? How can the US (whose current account deficit surged in November) get its deficit in line if major competitor countries insist on running trade surpluses, spurring exports and maintaining weak domestic demand at home? This is something the G-20 has been completely unable to sort out.

These sorts of structural imbalances helped to lead to the last financial crisis. Such flows underpinned the 1973-78 oil boom-bust cycle. Factors that put persistent surpluses sand deficits in play are dangerous and the G-20 has not plan to sort it out. At the weaker dollar works to mitigate the US imbalance problem even if it is playing with fire.