When French President François Hollande announced on the July 14 Bastille Day national holiday that “recovery has arrived,” he was quickly criticized by economists, business executives and other pundits, who pointed out just how the French and European economies remain mired in the doldrums. The assertion seemed so outlandish that 72% of the French public told a poll they didn’t believe their President, judging him to be “overly optimistic.”
But even if Hollande’s upbeat interpretation was politically motivated, the economic news out of Europe in the past few days suggests that the deep recession that has ravaged the continent over the past two years may indeed finally be easing. Business confidence is beginning to pick up, manufacturing activity is once again on the rise, albeit weakly, and in some of the worst-hit countries, including Spain and Greece, exports are finally growing again, from a very low level.
“We’re on the verge of seeing positive GDP [in the euro zone] after six quarters of decline, the longest recession in postwar Europe,” says Mark Wall, co-head of European economics at Deutsche Bank’s research unit in London.
Don’t hold your breath. The uptick in activity is so weak that it’s hard to describe it as a real recovery. Exports remain sluggish, including from Germany, the dominant economy, capital investment is paltry and bank lending remains spotty. The International Monetary Fund, for one, is calling for the European Central Bank (ECB) to ease interest rates further and for governments to be granted more flexibility to support their economies.
“I wouldn’t say we are out of the woods,” says Zsolt Darvas, a research fellow at the Bruegel think tank in Brussels who formerly worked at the Hungarian central bank. “The euro area will continue to remain weak.”
In fact, the French public’s skepticism seems well founded: one of the few places where there is no real sign of improvement is France itself.
Certainly, the return to growth isn’t strong enough to reverse the rise in unemployment rate, which has hit 12.2% in the 17 nations that use the euro, up from 11.1% a year ago and 9.5% in 2011. That overall figure masks big variations. In Spain, the government has just announced that the unemployment rate dropped in the second quarter to 26.3% from 27.2%. It was the largest drop in five years, but to a level that by any standard remains excruciatingly high.
Ask economists and other experts about the short-term prospects, and they’ll reel off a range of risks, from lingering problems with undercapitalized banks to a continuing slowdown in China preventing a return to more robust exports. It certainly doesn’t help that most governments are continuing to pursue some form of fiscal austerity measures, including budget spending cuts and tax increases.
But even a modest uptick is better than no uptick at all. The clearest signs have come from a purchasing managers’ index for the euro zone, published on July 24, which showed the index bouncing above the “no-change” level in July for the first time in 18 months. Chris Williamson, chief economist at Markit, the firm that publishes the index, said the rise “provides encouraging evidence to suggest that the euro area could — at long last — pull out of its recession in the third quarter.” Merrill Lynch economists concur: “The PMIs are the first signal that projections of a recovery may indeed materialize,” the bank’s European economists said in a note. “For that to translate into sustainable momentum though, credit needs to start recovering.”
That was followed on July 25 by a report from the Ifo Institut in Germany showing that business confidence there had improved for a third month in succession, the highest level since April 2012. There have also been glimmers of hope out of Spain, where the central-bank forecast that the economy may have contracted by just 0.1% in the second quarter, after a 0.5% decline in the first quarter. That prompted an optimistic forecast from the Economy Minister, Luis de Guindos, who told parliament that “I am convinced that the worst is over.”
In Britain too the news is less bad than it has been. On July 25, official figures showed GDP growth of 0.6% in the second quarter, double the growth in the first quarter, prompting George Osborne, Chancellor of the Exchequer, to announce that the economy “is out of intensive care.”
Governments across Europe have a huge vested interest in a sustainable upturn, of course. In Germany, Chancellor Angela Merkel faces parliamentary elections on Sept 22, and any evidence that her austerity cure for the rest of Europe is bearing fruit could help her win re-election. In France, Hollande’s popularity ratings are at the lowest of any President since the beginning of the Fifth Republic in 1958. Spain’s Prime Minister Mariano Rajoy is currently fighting bad press linked to a corruption scandal.
A closer look at the driving forces behind the economic improvement suggests that it’s not as robust as the politicians would like.
First and foremost, the global economy seems to be in slightly better shape, especially in the U.S., whose GDP grew by 1.8% in the first quarter, according to revised data — a modest advance by American standards but one that still far outstrips European levels. Deutsche Bank, for one, is expecting Germany’s second-quarter growth to be around 0.5%, with the third and fourth quarters slightly weaker. “Germany is better than the E.U., but at best it’s moderate,” says Oliver Rakau, an economist at Deutsche Bank in Frankfurt. Any upturn in the world economy is particularly good news for Germany, the European export champion, which is currently being hurt by a slowdown in China. For the moment, the German economy is mainly being driven by domestic consumption.
Austerity policies are being maintained, but are less draconian than they were in 2012, the peak year for cutbacks; that’s particularly marked in Greece and Portugal, but the gut-wrenching reductions in government spending continue nonetheless.
A third explanation for the stronger confidence is the availability of bank credit — but here too the data seems ambiguous. A European Central Bank survey of banks on July 24 showed that they considered they were being rather less tight with credit than they had been. But an ECB report published the following day based on actual numbers rather than expectations showed that there was no easing of the tough credit stance that has been a significant cause of the slowdown for companies and households.
Wall at Deutsche Bank says the solidity of European banks remains one of his biggest concerns. A series of stress tests will be conducted on the banks early next year, and “the more I look into next year the more nervous I get.” Depending on the criteria used, “this could cloud the outlook and impede the recovery if it weighs on the banks’ willingness to lend,” Wall says. All in all, it’s a very mixed picture.