According to data released this week, the Eurozone hovers over the prospect of a recession, and there is no policy consensus over how to react. Europe’s biggest economy, Germany, narrowly escaped recession, technically defined as two consecutive quarters of negative growth. The French economy, which outperforms German, is also decelerating, with an immediate impact on the labour market.
The two biggest economies are slowing down as Europe’s export-driven economy is particularly exposed to the Sino-American trade war. Given historically low levels of unemployment, domestic consumption provides some resilience, but growth is decelerating rapidly across the 19-member currency area.
According to preliminary data published on Thursday, the German economy escaped recession in the third quarter with consumption keeping the economy afloat at 0,1% growth. During the third quarter, the French economy outperformed the German, growing by 0,3%. Still, domestic consumption is running out of steam, and this week’s projections suggest a deceleration to 0,2% in the fourth quarter.
German unemployment currently stands at 3,1%, with GDP per capita having recovered the shock of the financial crisis. The French labour market is weaker. French unemployment nudged to 8,6% in the second quarter, up from 8,5% the previous three months, according to data released on Thursday.
Exports account for 47% of the German GDP, with manufactured goods weighing heavily in the “Made in Germany” basket. The Sino-America trade war is costing Germany, as China is a significant importer of German vehicles and industrial equipment. “We do not have a technical recession, but the growth numbers are still too weak,” Economy Minister Peter Altmaier told ARD public television on Thursday.
At the same time, US tariffs on aluminium, Airbus, food and drink are also taking their toll on the French economy, not to mention the Spanish and the Italian.
While business and consumer confidence are weakening and exports cannot drive the economy forward, European Central Bank ECB) President Christine Lagarde faces resistance in implementing the second wave of quantitative easing announced by her predecessor, Mario Draghi.
Austria, Germany, and the Netherlands oppose the ECB’s bond-buying program, which has subdued yields, easing the pressure on heavily indebted economies, such as Italy. Last week the German government’s independent panel of economic advisers reported that they do not expect a deep recession, recommending the continuation of a budgetary policy that limits spending and borrowing and favours a budgetary surplus.