End of Recession in the Eurozone is only the First Step on the Road to Recovery

After six quarters of decline, the eurozone has finally emerged from recession, and what is more, it did so by growing above (admittedly low) expectations. Yet there is a long way to go before the currency bloc is restored to full health, and with unemployment above 12% there is a way to go before the fragile recovery can become cemented by strong and sustained private consumption.

A new Franco-German pact

The two biggest economies in the region both surprised on the upside:

  • Germany reported growth of 0.7% over the previous quarter but this was assisted by one-off factors such as a strong rebound in construction. The outlook for Germany remains positive, with Eurostat predicting real GDP growth of 0.4% in 2013 as a whole, but the slowdown in China may dampen the export economy’s performance and 0.7% growth may prove to be the high-water mark of the year;
  • France posted growth of 0.5% over the previous quarter, also above many analysts’ expectations. This was driven by positive growth in private consumption and a strong performance by
    the manufacturing sector. With France and Germany accounting for almost half of eurozone GDP the performance of the currency bloc as a whole is closely allayed with that of its two biggest economies.

Real GDP Growth in France, Germany and the Eurozone: Q3 2010-Q2 2013

Real GDP Growth in France, Germany and the Eurozone Q3 2010-Q2 2013

Source: Eurostat

Note: Data are seasonally adjusted

Uneven growth remains the rule

The positive growth masks declines in the third, fourth and fifth largest economies in the eurozone – Italy, Spain and the Netherlands – which declined by 0.2%, 0.1% and 0.2% respectively.  These economies accounted for a combined €1,870 billion of consumer expenditure in 2012, equivalent to more than one third of consumer spending in the eurozone. With performance across the region patchy, strong sustained growth is unlikely to be achievable in the short-term.

Although Q2 figures are to be welcomed, the outlook for the eurozone remains one of weak growth. With high unemployment and with a relatively weak external environment the eurozone can expect to continue on its long and lingering path to recovery.