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Economy in Brief

Growth Returns to the Euro Area
by Robert Brusca  July 30, 2021

Growth is back in the EMU and the recession is over. German growth is back in the 'plus column' as is growth in Portugal and Spain. Growth in the aggregate 'the four largest EMU economies' is back in the 'plus column' after two consecutive declines and after five quarters of growth declines in the past six quarters. EMU growth overall has four declines in the previous five quarters. There has been more weakness among the largest economies than among the others.

All of the countries in the table show that growth over the past four quarters has been exceptional in the top 2 percentile of all their respective queue standings. The current growth rates are measured with Q2 as the base; that's the quarter in which GDP was hit hardest globally. That goes most of the way toward explaining why GDP growth right now seems so strong.

Growth in this nascent recovery has been unstable; only the U.S. has a string of uninterrupted growth rates from Q3 2020 through Q2 2021. Belgium comes closest among European economics; its only Q/Q GDP decline on that timeline is a 0.3% drop (saar) in Q4 2020.

All countries come out of the Q2 decline with blazing fast growth. The weakest gain in Q3 2020 is the 16.3% (saar) gain out of Greece; that compares to the strongest gain, a 99.2% (saar) rise in France. The median gain among 13 European economies is a rise at a pace of 48%. But after that among those same 13 economies, five immediately lapsed back into a growth decline and one followed strong growth with a tick up in growth at a 0.1% annual rate. The next quarter, Q1 2021 brought declines to six of these countries (Austria, Denmark, Germany, the Netherlands, Portugal and Spain, while France logged zero growth). Meanwhile, Q1 2020 saw exceptionally strong gains in Ireland and Greece, strong gains in Luxembourg and Belgium and gains in Italy and Finland.

However, mid-year of 2021 we are seeing expansion across the board in the six early reporting EMU members. And growth is quite solid to strong in all of them. The four largest EMU members have weighted average growth of 7.2% annualized while the rest of the EMU is growing at a stronger 11.8% annual rate.

We can rank these six reporting members by cumulative performance for Q1 2020. On that basis, the best cumulative growth has come from France, followed by Italy, Belgium, Portugal, Spain and with Germany last. France, Italy, and Belgium have brought the GDP level back above its Q1 2020 level. Germany, the growth laggard, still has GDP 1.7% below its Q1 2020 level.

Meanwhile, inflation is percolating in the EMU and on the boil in the U.S. Japan's inflation has just been enough to lift it out of a brief episode of deflation. Central bankers are still of the opinion that this will be transitory.

But what in this world is not transitory by some measure? In the broad sweep of history, the age of dinosaurs was transitory as was the Hundred Years' War between England and France. The real question is whether inflation will get too high, remain too high, and affect people's behavior and their expectations. Pricing behavior before Covid had firms averse to raising prices because they did not want to lose customers and market share. But now it is a different world. And there are all sorts of shortages and firms raise prices. When the shortages diminish or go away what will make firms stop raising prices? There is already a new ethic in America to pay workers more – the expression is 'a living wage.' Are firms simply going to turn that off like a switch and go back to merciless cost containment?

I think there is a lot about how the world that has changed; businesses have changed and some priorities have changed. Central bankers are trying to not acknowledge that. It all leads to a more inflationary environment. Central banks have taken the first step to get there by having changed their policy mandates to shoot at targets that are unspecified averages of inflation. So believe what you want but look first at behavior. Behavior, especially pricing behavior, is changing. And this is something quite different from expectations and will give the environment a whole new make-over.

Commentaries are the opinions of the author and do not reflect the views of Haver Analytics.
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