After the Torpor, Green Shoots? ‘Modest Recovery’ Forecast for Europe as Global Economic Outlook Strengthens despite Emerging Markets Difficulties (11/9)     Print Email

By James D. Spellman, Strategic Communications LLC

Despite global economic difficulties, especially those spilling over from the downturn in China and other emerging markets, a modest recovery is forecast for Europe next year. These “green shoots” come as the European Central Bank decides in early December whether to expand its programs to jumpstart economic growth and avoid deflation, “quantitative easing 2.”

“Overall, euro area real GDP is forecast to grow by 1.6% in 2015, rising to 1.8% in 2016 and 1.9% in 2017,” the European Union forecast projects. “For the EU as a whole, real GDP is expected to rise from 1.9% this year to 2.0% in 2016 and 2.1% in 2017.”[1] Second-quarter GDP increased in all 28 EU states except France where it remained unchanged.[2]

Europe stands to benefit from global economic growth, which the International Monetary Fund economists revised upward to 3.6 percent next year.[3] And, the impact of China’s slowdown on Europe seems to be muted. “Although China is the third-largest export market for both the United States and Europe, even a sizable drop in exports to China would be expected to cut US or European GDP growth by only a few tenths of a percentage point,” says Ira Kalish, the chief global economist of Deloitte Touche Tohmatsu Limited.[4]

Source: European Commission, “Autumn 2015 forecast: Moderate recovery despite challenges.”

Do these green shoots promise long-term growth?

Economic sentiment hit its highest level in four years in September and held steady in October, according to two barometers the European Union prepares, the Business Climate Indicator and the Economic Sentiment Indicator. A weaker Euro and faster growth in the United States are boosting business confidence and corporate borrowing in Europe. Europeans’ optimism was strongest for construction and retail, but their sentiment turned bearish for the financial services sector. Capacity utilization – the extent to which existing employees, infrastructure, etc. are kept busy – in services businesses continued to rise in October to its highest level since 2011, albeit a slight advance that month but still showing a steady upward trend begun in 2013.

Source: European Commission, “October 2015: Economic Sentiment broadly unchanged in both the euro area and the EU.” October 29, 2015. .

The sentiment index has been a fairly reliable indicator for economic outlook in the months ahead, as an analysis by Wisdom Tree shows.

spellman201511chart3Source: Jeremy Schwartz, “A Recovering Eurozone Economy: Where Should You Position?” Wisdom Tree, October 29, 2015. .

Consumers have been the drivers behind the growth in Europe so far. The sharp drop in oil prices – roughly in half over the past year to trade at $45 a barrel for crude oil – left Europeans with more money to spend elsewhere, and they have been doing so. A ten-dollar fall in the barrel price of oil adds 0.2 percentage points to global GDP growth, economists estimate. The skin care company Beiersdorf AG of Germany recently revised sales forecast upward for the next few months, one sign of discretionary consumer spending strengthening. Less clear is the impact on consumer spending from the European Central Bank's commitment to continue buying $67.3 billion (€60 billion) of bonds every month, or $1.1 trillion (€1 trillion) over the life of the program. Typically, an expansion of credit initially fuels growth in real estate and infrastructure construction.

Source: Jeremy Schwartz, “A Recovering Eurozone Economy: Where Should You Position?” Wisdom Tree, October 29, 2015. .

Unemployment, though, continues to remain stubbornly high, although the rate has fallen over the last 12 months in 22 European countries. Economists worry that there is too high an incidence of "hysteresis," when prolonged unemployment becomes permanent because the job seeker’s skills when employed are less and less valued as employers’ demands skills change. At 11 percent on average for Europe, that does represent a four-year low, and the last quarter’s drop was the largest quarterly drop since 2007. Yet, unemployment hoovering near 11 percent on average in Europe is likely to remain for several more years, according to the European Central Bank, with the IMF forecasting a decline under the best conditions to 9 percent in 2020.

Source: Alexander Börsch, “Eurozone: Growing despite headwinds.” Global Economic Outlook, Q4 2015. Deloitte University Press.

The legacy of the global financial crisis in between 2008 and 2009 continues to weigh on Europe, including household debt levels and the enormity of banks’ nonperforming loans. “Given the fading impetus from tailwinds, the continued drag from legacies of the crisis, such as deleveraging pressures and weaknesses in banking sectors in some member states and the weaker global economy, growth in 2016 and 2017 is set to remain modest,” said Marco Buti, the head of the commission’s economic directorate.
Ahead, the key economic signs to watch include whether consumer and business confidence builds, leading to spending increases and more borrowing to expand companies’ operations, particularly as the benefits of the oil price drop wane.

[1]European Commission. Press Release.

[2]Geoff Cutmore, “Europe: The best is yet to come?” CNBC, October 12, 2015.
[3]IMF, World Economic Outlook (WEO): Adjusting to Lower Commodity Prices. October 2015.
[4]Ira Kalish, “China: The slowdown and its global impact.” Global Economic Outlook, Q4 2015. Deloitte University Press. .