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Europe's Self-Inflicted Recession

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

For those who dine on dismal developments, Europe is serving up a feast. Data last week confirmed that the dreaded double-dip is indeed in full swing. As appetizing as this latest dish might have been to the media, dismal scientists and the Eeyores of the world, it was virtually ignored. The well-timed announcement by the European Central Bank of a new, aggressive bond purchase plan pre-empted the GDP story – but it remains to be seen if it can negate it. How deep and wide is Europe’s neo-dip?

In case you missed it – and it wasn’t hard to – the European Union as a whole contracted by 0.6 per cent in the second quarter of this year, following a 1.3 per cent dive in the fourth quarter of 2011 and a marginal 0.1 per cent slip in the first three months of this year. The total decline isn’t anywhere near as severe as the four-quarter plunge that occurred in 2008-09, but unlike then, today’s tumble is from a much lower height, and there is now much less policy room to engineer a rebound.

While no country in the Union is escaping the malaise, the effects are far from even. Greek GDP has declined in 13 of the past 16 quarters, and until recently, with increasing severity. There are few adjectives that adequately describe the extent of this localized modern-day depression. Although not as badly off, Portugal’s alarming seven-quarter slide is intensifying. Ireland is battling volatility, and can still be subjected to large quarterly plunges. Italy is undergoing a sharp, four-quarter slide that has taken a 2.5 per cent bite out of the economy thus far. Spain’s experience is similar, and the UK has now seen three sizable consecutive declines. It is noteworthy that this is not just a motley group of peripheral nations, but core economies as well, hefty enough to weigh down the whole zone

A group of countries sits in the middle of the pack. In each, average growth over the past two years has been positive, but still quite slow. Among them, France is the steadiest, although its growth has slowed to a crawl in the past three quarters. Belgium and Finland were steady, but more recently have been too volatile to gauge. The Netherlands saw a big drop in the second half of 2011, but has shown decent growth in the past six months. These economies aren’t about to lead European growth, but what they add to the mix is greater resilience than a lot of others.

Europe’s growth leaders are still generally growing at sub-par rates. Austria has been surprisingly strong, only once in the past eight months even getting close to a flat quarter. Poland might be slowing, but is well ahead of the pack. Germany is a stalwart, depending on strength in trade growth to keep quarterly gains ahead of average. Although the region is looking for and depending on its higher-growth nations, no one is pulling significantly ahead of the pack, and momentum is in question.

A key reason for the weakness is the public sector. According to the IMF, fiscal drag is taking 1.1 percentage points from GDP growth this year. The average forecast has Europe sliding 0.5 per cent for 2012, suggesting a positive number if the cutbacks weren’t there. The good news? The burden is expected to be lighter next year, bringing average performance up. The bad news? Even so, leading indicators are suggesting further weakness before growth resumes.

The bottom line? Europe continues to struggle, and the effects are widespread. From the current vantage point, higher growth for the zone is more likely to come from outside of its borders.


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