EMU GDP Is Weaker Than Expected and Declining on the Quarter

Third quarter GDP in the European Monetary Union weakened and surprisingly contracted. GDP fell at a 0.4% annual rate in the third quarter after rising by a 0.6% annual rate in the second quarter. The unexpected drop has naturally raised questions about the possibility of a rule-of-thumb recession occurring in Europe (some report this as a ‘technical’ recession. However, there's nothing technical about two declines in a row {counting ‘all the way’ up to 2.} Rather, it is a rule-of-thumb that sometimes makes sense, and sometimes does not). We are reminded that in the first and second quarters of 2022, real GDP in the United States declined, with GDP falling at a 0.5% annual rate in the first quarter and then edging lower by a 0.1% at an annual rate in the second quarter. Almost no one called that a recession. Those that did probably did so more for political reasons than for economic reasons. The U.S. GDP drops were not considered to be part of a recession in the U.S. by anyone who looked at data seriously. The ongoing substantial growth in employment in the U.S. during those two quarters made the drops in GDP oxymoronic recession signals. This reference highlights the fact that recessions are more complicated than just a couple of numbers’ weakness quarter-to-quarter and it has a lot more to do with the economic processes that might be in play.

Europe....no recession but LOTS of weakness Right now, in the European Monetary Union, Italy reports a 0.4% GDP decline in the second quarter and flat GDP in the third quarter. Apart from that, no other early reporting country is flirting with a rule-of-thumb GDP definition. However, it's quite clear that there is a lot of weakness. • Germany, for example, shows low growth; it has GDP up by 0.1% in the second quarter after being flat in the first quarter and it has a decline in GDP in the third quarter, to go along with the decline in GDP in the fourth quarter of 2022. Germany, in the last four quarters, shows two declines in GDP, one quarterly increase of 0.1% (annualized) and another quarter which GDP growth was flat. We can certainly argue about whether this constitutes some kind of recession in Germany. It certainly constitutes an extremely weak period of growth for the German economy. • Ireland has two previous quarters of negative growth in the fourth quarter of 2022 and in the first quarter of 2023. That string is interrupted by a 0.5% increase in the second quarter and now a 1.8% annual rate decline in the third quarter. Ireland has three GDP declines in the last four quarters. • Portugal logs a decline in GDP in 2023 Q3 after an increase in Q1 of only 0.1% annualized. • The four largest European Monetary Union economies show tepid growth at a 0.1% annual rate in the current quarter after two quarters in which the annual rate for growth was 0.2%. They were preceded by one quarter in which GDP in the four largest economies fell at a 0.1% annual rate.

Growth, leadership, and recessions The four largest monetary union economies are not providing a lot of lift for the rest of the community. Based on current preliminary estimates, growth in the rest of the European Monetary Union fell at a 0.5% annual rate in the third quarter after rising by only 0.1% at an annual rate in the second quarter. Growth in the rest of the monetary union fell by 0.4% in the first quarter. In the rest of the monetary union, we have two quarters of negative growth, Q1 and Q3, separated by one quarter in which growth gains only 0.1%, annualized. These statistics - these comparisons - chronicle a period of substantial ongoing weakness in the monetary union. However, is this recession? We think of recessions not just as a period when GDP goes flat or has moderate declines, but when there's something more severe going on in the economy accompanied usually by adverse credit events. Europe does not appear to have anything like that brewing. There are no severe disruptive declines in the economy; in fact, the labor market is still in very good shape and the unemployment rate across the monetary union is still extremely low across virtually all members (see Table below). This is similar to the United States when it had its two consecutive quarters of GDP declines and the job market remained strong. Europe’s job market seems to give us a pretty unequivocal response to the question of, ‘is the economy in recession?’ The answer is ‘no.’ And while it may not be in recession, it is still considerably weaker than authorities would like.

Current and ongoing economic conditions Inflation in the Monetary Union is still higher than the ECB's target and the ECB continues to take steps to try to rein that inflation in. However, as we see from the table for seven countries out of 12, unemployment rates have been declining in Europe. At the same time, inflation has been falling - and there is some hope that the rate hikes from the ECB are at or near their end. Oil prices, however, continue to be high as the combination of OPEC and Russia continues to squeeze supplies in order to keep oil prices on the high side, something that continues to create problems for central banks that are trying to hit their inflation targets after a long period of having missed them badly.

Risks remain The war is dragging on between Russia and Ukraine, there are new hostilities in the Middle East, and China’s economy is struggling under problems in its property market and beyond. The global economy is doing poorly and although the weak growth does not seem to be fertile territory for inflation to continue to take hold there is still the problem with pesky oil prices – and more. We see in the U.S. a still tight labor market leading to quite significantly stronger than expected gains by a more militant labor force in its collective bargaining. At the same time, the U.S. has been marked by weak productivity growth. All this must raise questions about what will happen to inflation in the future despite the sluggish economic growth. These same dynamics will be at work and other countries after the problems dealt with during the period of COVID the rise of inflation and the erosion of their real wages. The policy situation continues to be difficult, touch and go, for central bankers and other policymakers.