European Growth Holds Up Fairly Well

Eurostat today published preliminary figures for economic growth that were stronger than most analysts had expected. The euro area saw a quarterly growth of 0.4%, or 1.6% in the American way of expressing growth (quarterly change at an annualized rate). Both Germany and France saw a significant deceleration in growth, but this was to some extent counteracted by stronger growth in Holland and Spain. The EU as a whole saw even faster growth, at 0.5% thanks to 0.6% growth in the U.K. and a whopping 3.1% growth in Slovakia (which would translate into an annual rate of 13%). This is of course related to Slovakia's 19% flat tax policy.

So far, there is thus no real evidence of a "recoupling", where the European economy is dragged down into a recession by the American recession. Yes, the service sector purchasing manager index was weak in January, but while this statistic is not meaningless, it certainly isn't conclusive considering how it does no weighting for the size of the firms and how big the changes in activity is. And since most other indicators still indicate moderate but still positive growth in Europe, decoupling remains the most likely scenario. Europe's dependence on the U.S. economy is in fact very small, so there is simply no way that the scenario popular in the media, where falling European exports to America will cause a European recession can come true. Some parts of Europe with overheated housing markets, meaning the U.K., Ireland, the Baltics and Spain will likely face some domestic problems and the widespread fear factor in financial markets over the effects on Europe of the U.S. recession could create a self-fulfilling prophecy to that extent. But in most of Europe, the fundamentals are in fact improving, meaning that Europe should be able to decouple from the U.S. recession.