The good news out of Europe Thursday was both fleeting and misleading: Germany and France performed better than expected in the third quarter, with the first- and second-largest economies in the euro zone both reporting modest 0.2% growth.
The far more significant—and bad—news however came with confirmation that the eurozone, of which France and Germany are members, has sunk into recession for the second time since 2009. During the third quarter of 2012, the 17 economies sharing the euro shrunk by a collective 0.1%, after declining 0.2% the previous term. That slide represented a 0.6% retreat compared to Q3, 2011.
From there the picture darkens further. Most observers don’t expect year-end holiday spending by centime-pinching consumers to prevent further weakening across Europe in the final quarter of 2012. That’s causing many analysts to revise earlier forecasts of meager growth returning across the euro area in 2013. Such rising long-term pessimism is not just depressing for the 332 million people and countless businesses using the single currency. It’s also a real worry to countries around the world that rely on trade with the $12 trillion euro economic bloc to help fuel their own activity. And all that fretting won’t be over soon.
“These numbers show we’re not only confronting a grave economic recession in the euro zone, but also looking at a spreading social crisis in which harsh austerity, increased taxes, and surging unemployment are bringing Europe to its knees,” says economist Marc Touati, president of the ACEDEFI financial consultancy. “The outlook makes it very unlikely we’ll see an end to this recession before spring, 2013—at earliest. That means we’ll probably see the euro zone economy shrinking next year by around 0.5%.”Any good news in Europe was short-lived, indeed. Word that both France and Germany had posted positive growth in the third quarter was quickly swamped by far less happy data. Even as it announced France had escaped predictions of a fourth-straight flat economy with its 0.2% Q3 advance, the official French statistics agency revised its previous second quarter figure from 0% to -0.1%—effectively taking away growth with one hand as it gave with the other. And while Germany matched France’s 0.2% performance, that activity marked a slackening of the 0.3% growth Germany had attained in the second quarter, and less than half of the 0.5% in Q1.
That’s a downward direction in which virtually all of Europe is traveling. Thursday’s figures saw Italy, Spain and Portugal all prolonging their exile in negative territory–albeit at somewhat lower rates of decline than in Q2—while Greece’s full-blown depression placed it off the map. That was expected. What wasn’t were relatively robust economies such as Austria and the Netherlands slipping under the bar of 0% growth with respective -0.1% and -1.1% performances. Against that stalling background, European Union officials forecast flat to 0.1% growth for the euro area in 2013—which amounts to optimism these days in Europe.
Indeed, Touati not only shared the more pessimistic expectations of most Europe-watching economists prior to Thursday’s growth figures, but also calls the 0.2% advances by Germany—and especially France—both “miraculous” and “bizarre” in the current environment.
“If GDP numbers across the eurozone aren’t all reflecting the horrible unemployment and business investment realities we see, that’s a suspicious disconnect that we’ll see corrected very, very soon,” Touati says. “That means recession for France and other euro countries that Germany will probably barely avoid—though not without significant declines in German activity, starting with what’s looking like a bad fourth quarter.”
A quicker return to resumed growth might be engineered by ending the double jeopardy now imposed across most of Europe, as governments slash spending while raising taxes to battle deficit and debt levels. Touati argues, for example, that further cuts in state outlays would allow a reversal of tax hikes that might fuel consumer spending—and in turn stimulate economic activity. But even then, he admits, Europe would face what seem to be odds stacked against quick recovery on virtually all fronts.
“It’s astounding in this environment that the euro remains so over-valued that undermines export trade beyond the euro zone,” Touati notes. “No matter what else may go right over the next six to ten months, so long as the euro doesn’t drop closer to the $1.15 level (from a current $1.27 rate), any European recovery will be considerably handicapped.”