JANUARY 2017

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- Suresh Jaura
Publisher and Managing Editor

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EU: Climbing Out of the Abyss

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By Peter G Hall
Vice-President and Chief Economist Export Development Canada

Relatively speaking, this is old news. The European Union officially bade adieu to its protracted post-crisis recession in the second quarter of last year. But that was thanks mostly to the big economies. The troubled economies have been slower to shake off the red ink. One by one, they are gaining lift, and in certain cases, so much so that it is impacting employment statistics. Given the poor prognosis for these bedraggled economies, is the improvement sustainable, or a flash in the pan?

The most recent GDP numbers hail from Italy. Following nine successive quarters of economic decline, which can safely be classified a modern-day disaster for a G-7 nation, Italy squeaked out a modest increase in the closing quarter of 2013. The domestic economy remained soft, although improved. Growth came primarily from business investment and exports, suggesting relief from the faster-growing neighbours and a general pickup in global demand. The recent rise in the Euro poses a threat, but only if sustained. For now, momentum seems to be coming from the right sources.

Spain can now boast two back-to-back increases in quarterly GDP, following its own deep version of a 9-quarter recession. Like Italy, its gains come thanks to stronger exports, business investment and after an extended, choppy decline, sustained growth in consumer spending. Similarly, a 10-quarter slide in Portugal has given way to two positive quarters, with stellar export growth leading the way, and decent contributions from investment and private consumption.

Since early 2011, the Irish economy has battled persistent decline with on-again, off-again growth spurts. As such, it is hard to say whether recent gains are truly a departure from Ireland’s post-2010 experience. However, they are nicely synchronized with the turnabout in other distressed Euroland economies, and they are occurring across broad sectors of the Irish economy. So far, so good.

Normally, it takes a while for GDP growth to impact the employment figures. This time, it seems that hiring is kicking in quickly. For the first time since the spring of 2011, pan-European employment rose in the fourth quarter of last year. And again, the most impressive gains were seen among the post-crisis weaklings. Leading the growth were Ireland and Portugal, both up an impressive 0.7 per cent on the quarter. Spain, with a stratospheric unemployment rate of 26 per cent managed to kick out employment growth of 0.6 per cent. Even Greece, with its 28 per cent unemployment rate produced a 0.2 per cent increase, contributing to the overall gain.

Employment gains may be the clearest sign yet that this movement is indeed sustainable. Normally in economies as distressed as these, employment is one of the last indicators to budge. Given the particular duress that businesses have faced since the crisis hit, it is actually quite surprising that they are looking for workers this early. It could well be that in an effort to survive, they really cut workers back to the bone, and with orders now increasing steadily, they have no option. If so, this would be very good news for beleaguered workers across Europe, and should soon boost consumption.

Another surprise is that the punishingly high unemployment rates have not caused more dissent. Indeed, official unemployment rates in the Greek-Spain zone are well-known to be well beyond known insurrection tipping points. If indeed a turnaround is happening, theorists will have to examine the experience of these distressed economies more carefully for the causes of their aberrant social cohesion over this trying time.

The bottom line? Signs are still pointing to a revival of European economic fortunes. If so, the most distressed economies have managed to keep it together in times that rarely get more trying. We can only hope that dissent in other parts of the area doesn’t interrupt the momentum.

© EDC

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