Thursday, May 15, 2008

Euro Area Economy Show Resilience

In sharp contrast to Estonia, the euro area economy showed great resilience during the first quarter, with growth accelerating to 0.7%, from 0.4% in the first quarter. Growth was primarily driven by Germany which saw a full 1.5% growth rate. Growth was also fairly strong in Greece and Austria. France saw growth of 0.6%, which if not strong in a absolute sense, is strong by French standards. By contrast, growth weakened considerably in the Iberian peninsula, with perennial laggard Portugal seeing negative growth, and Spain seeing growth slowing to 0.3%, the lowest in a very long time. Holland also saw growth slowing significantly. Of the countries not yet reporting, Finland and Slovenia probably saw high growth, while Ireland and Italy probably saw very little or negative growth.

Note that these growth numbers are expressed in the European way, that is simple quarterly change. Expressed in the American way, quarterly change at an annual rate, these numbers would be 4 (or slightly more than 4 due to the compound growth effect) times higher.

Growth in Germany appears to have been boosted to some extent by one-off factors, such as a mild winter that boosted construction activity, and so we should certainly not expect any more quarters with the same growth rate as this one. Still, there is considerable underlying strength in the German economy as free market reforms have boosted the structural growth rate and as German households and companies have high savings and low debt. The same is essentially true for Finland, Austria and Holland (whose growth rate was probably suppressed temporary factors). Slovenia is at the same time experiencing something of an inflationary boom. On the other hand, countries like France, Italy and Portugal have deep structural weaknesses. And Spain and Ireland are being dragged down by housing busts.

The net result of the relatively strong north Eastern bloc and the structural or cyclical weakness in the rest will probably be weak, but still positive growth.


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