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The European Economy: Hope for an End to the Crisis

October 21, 2013

Since the second quarter, hope has been growing that the financial crisis has bottomed out. After five years of difficult times, European governments and citizens are more than ready for a ray of good news.

And good news has arrived. The GfK Consumer Climate Europe reports the European Union (EU) economy registered 0.4 percent growth in the previous quarter. France, Germany, Portugal and the United Kingdom all recorded considerable increases in some areas. While Italy’s and Spain’s economies also seem to have recovered slightly, they are still shrinking.

There are many factors that have caused this recovery in Europe. Exporters are benefiting from modest global growth. In some countries, consumers are now becoming increasingly prepared to spend money again. Policy is more clearly departing from its stringent austerity path, which had been holding domestic economies back. Tourism has helped improve the situation, particularly in the Southern crisis countries.

Last summer, the EU registered its first marginal decline in the overall number of unemployed. However,  a true trend reversal on the labor market is not yet on the horizon, with the rate still at 11.0 percent. It is expected that even more people will be unemployed in the coming year. A significant drop in this grim statistic is only expected to begin in 2015, because usually labor market is a lagging indicator for the economic performance.  

Of course, realities can be quite different when one examines individual countries. The recovery may extend to a border, but does not always cross it.

Consumers in the United Kingdom are starting to buy again. The state is investing, and citizens’ economic expectations are picking up sharply. With the economy having grown 0.6 percent in the second quarter experts expect an increase of 1.5 percent by the year’s end. But the current upswing should be celebrated with some caution, because it is principally based on private consumption, followed by public investment.

In France, economic expectations have steadily recovered over the last few months. French consumers are hopeful that the recent economic growth will continue and stabilize. In the second quarter, the economy grew by 0.5 percent. However, the EC is predicting a slight decline of 0.1 percent for 2013 as a whole.

While the economic outlook has also improved in Italy over the past few months, companies are not out of the woods yet. Unemployment remains high, yet hope is building among consumers, not least because of the current economic recovery plan. Through this, the government intends to improve the railway network, renovate schools and repair bridges and tunnels. In addition, it plans to borrow another €10 billion to settle previously unpaid debts to domestic companies. While Italians do not expect income to increase in real terms, they are confident that it will remain the same and not fall further.

Following the first economic recovery in Spain, after many months, citizens can at least expect their incomes to not fall any further. A return to slight growth is even expected for the second half of the year. Tax increases and salary cuts are not planned for the coming months. The economy is on the right track.

The Portuguese economy is only just beginning to show slight signs of revival. Experts forecast a drop of 2.3 percent in economic performance for 2013. Growth for next year is predicted to be only 0.6 percent. However, in the second quarter of 2013, GDP improved by 1.1 percent in comparison to the previous quarter. This outlook is raising the hope of consumers. And an improved sentiment is principally attributable to tourism, which has picked up significantly this year. In the first half of the year, the number of hotel guests increased by 3.5 percent in the first six months of 2012. Even the number of overnight stays rose by 5.4 percent.

Although the Greek economy is continuing to shrink, there are increasing signs that it is slowly getting back on its feet again. The prediction for recession at year-end is -4 percent, compared with -6.4 percent at the end of 2012. For the first time in ten years, there will be a small, primary surplus in the state budget, making it possible that the recession can be overcome next year (forecast +0.6 percent). As in Portugal, tourism is currently playing a major part in this recovery, since one in five Greeks work in tourism. This development has echoed in consumers’ willingness to buy, which seems to recover slowly.

While Slovakia was one of the countries with the strongest growth in Europe last year, in the second quarter, its GDP only grew by 0.3 percent in comparison to the first quarter of 2013 and 0.8 percent in comparison to the same quarter in 2012r. Despite the economic growth, the situation on the labor market can be described as critical, with the unemployment rate of 14 percent. This is the highest in Central and Eastern Europe. Experts predict that a significant decline will not start until 2015. Consumers have clearly not given up hope that the economy, and also the labor market, will recover in the foreseeable future.

Similarly, the economy in the Netherlands is in recession. According to Eurostat, unemployment is rising and is now at 7 percent. This poor economic situation is primarily attributed to the collapse of the real estate market. In the past year, housing prices have fallen by about 30 percent. The mortgage debts of many Dutch nationals are now almost double the actual value of their properties. This has led to many consumers cutting back spending on all but the essentials.

Overall, these findings show that the worst of the present crises — and of consumer fears — might be over. This should be a good basis for a recovery of the European economy in 2014.

Rolf Buerkl is Senior Research Consultant in Business and Technology for GfK. He can be reached at rolf.buerkl@gfk.com

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