Europe desperately seeking growth
Bruno Cavalier, Chief Economist ODDO BHF Asset Management.
KEY HIGHLIGHTS:
- After a decent start to the year, the European economy is showing signs of weakness.
- The recovery is being threatened by difficulties in Germany and France.
- Germany has massive trade surpluses, but its cumulative growth over five years is null.
- After decades of denial, France can no longer ignore its enormous public debt wall.
- In a context of disinflation, the ECB should further loosen its monetary grip.
In 2022 and 2023, The European economy has weathered the triple shock of the gas crisis, soaring consumer prices and an unprecedented rise in interest rates. At the start of this year, the pieces seemed to be falling into place for the eurozone to finally kick-start a recovery. Despite the ongoing war in Ukraine, the energy markets had largely returned to normal. As a result, inflation fears were receding. The ECB could consider easing monetary policy once price increases had returned to normal. Overall, the three negative shocks were fading.
What happened to these hopes of recovery? Until the beginning of Summer 2024, the economic data were moving in the desired direction. Over the first half of the year, real GDP in the eurozone grew at an annual rate of 1%. After eighteen months of virtual stagnation, that is a sensible improvement. However, this pace is still far from the trend seen before the pandemic (1.9%). It also pales in comparison to the United States over the same period (2.2%).
A closer look reveals that the foundations of this nascent recovery are not very solid. First, the business climate indicators show major disparities across sectors. The industrial sector, which is normally at the forefront of the cycle, is still struggling, while services continue to be buoyed by the end of the post-pandemic recovery. By definition, a catch-up after an exogenous shock cannot last forever.
Second, it should be noted that the components of the nascent recovery are unbalanced. In the first half of the year, growth was mainly driven by strong exports, while household and business demand fell. Consumers have been feeling a little more confident for several quarters now, but this has not translated into increased spending. On the contrary, according to Eurostat data, the household savings rate has been rising since the spring of 2022 and reached 15.7% of disposable income in mid-2024, around three points higher than normal. As for their investment rate, i.e. their property purchases, it has fallen by more than one point in two years.
A third cause of fragility is the growing divergence between countries. Europe is not made up of countries with the same production base, nor the same areas of specialization. Differences are inevitable and usually without major consequences. Beyond a certain point however, this raises questions on the calibration of the economic policy as well as the cohesion of the zone. More than ten years ago, the weaknesses were concentrated in the southern countries, suffocating under the weight of their public and private debt.
