The eurozone may not fall into a deep recession, but it will struggle to recover
The euro zone (EARN) appears to be in recession, with the good news that a deep recession can be avoided and the bad news that growth is hovering near zero with little left to drive a recovery.
Economic headwinds are so stubborn that next year will also be challenging, and the weakening growth potential suggests that even if the eurozone economy rebounds, growth will struggle to exceed 1%. Deep structural problems mean that Europe is bound to lag behind most other big economies for years to come.
Tuesday's data showed that gross domestic product shrank 0.1 percent in July-September from the previous three months, suggesting a shallow recession if the fourth quarter is as weak as early indicators suggest.
The survey showed growth was broadly flat throughout the year, while record high interest rates combined with a tightening of budget spending will limit expansion to 0.6 per cent next year. Optimists, including European Central Bank (ECB) Executive Board member (and chief economist) Lien, argue that demand should recover because workers are now enjoying a pick-up in real wages, which will boost confidence.
The Labour market remains tight and the world economy is rebounding, so external demand may also be better. But others say there is little sign of the kind of rebound in confidence the ECB is hoping for, citing high borrowing costs that have deterred investment, a weak Labour market and weaker-than-expected demand from abroad.
Europe's shrinking working-age population could also pose a problem. Companies are holding on to workers for fear of finding them in the future, creating a tighter labor market that could fuel wage growth and weaken productivity.
The outlook beyond next year remains grim. Europe's working-age population will shrink, with little productivity growth. Businesses complain of growing bureaucracy that undermines their competitiveness, while the integration of the eurozone's economic union has stalled, with little political will to move forward.
The European Commission now sees potential growth in the euro zone of less than 1.5 percent, shrinking to 1.2 percent by 2027, down from 2-2.5 percent at the turn of the century, largely due to demographic changes and lackluster efficiency gains. "Many countries were already behind in the 1990s," Lien said recently. There is no progress, only regression."
Germany appears to be the biggest drag. Germany's energy-intensive heavy industry relies on external demand for growth, leaving it ill-prepared for the new reality of expensive energy and trade tensions. Potential growth in Europe's largest economy is now below 1 per cent
"Europe has already had a year of zero growth and is now entering a year in which both monetary and fiscal policies are designed to restrain growth," said Eric Nielsen, economic adviser at UniCredit Bank.
CM Trade Mobile Application