Eurozone needs action to recover lost ground

The eurozone economy continues to lag behind the other major developed economies in terms of its growth performance and labour market conditions.

The US has enjoyed moderate growth in the past couple of years, while economic conditions are improving in the UK and Japan. All three economies have seen job growth and a fall in unemployment in recent times.

By contrast, the eurozone economy remains mired in recession, with contracting output and a rising jobless rate. The unemployment rate is over 12% in contrast to the sub-8% rates in the US and UK.

The eurozone economy contracted again in the first three months of this year, marking the sixth consecutive quarter of declining output or recession, with no clear sign yet that an upturn in activity is imminent.

The pace of GDP decline did moderate in the quarter, with output contracting by 0.2% after its 0.6% fall in the final quarter of 2012.

This mainly reflected a slight improvement in consumer spending, which rose by 0.1% after five consecutive quarterly declines.

However, investment was down for an eighth consecutive quarter, with the pace of decline accelerating, while total domestic demand continued to fall.

Net trade made a small positive contribution to growth, but only because imports fell by 1.1%. Exports showed a 0.8% drop after having fallen by 0.9% in the previous quarter.

Manufacturing continued to struggle, with output down by 0.3%. Meanwhile, construction output continued to slide, falling by 0.7% in the quarter, leaving it 3.6% below year earlier levels. This is a double-dip recession, coming very soon after the very severe recession of 2008-09.

Output has not recovered to anywhere near its level ahead of the 2008-09 recession. GDP in the opening quarter of 2013 was still some 3.25% below its level five years earlier.

Leading indicators of economic activity showed some signs of improvement in May, after a weak March/April, though they remain at recessionary levels. The eurozone’s composite PMI, a good leading activity indicator, rose back up to 47.7 in May. This is in line with its first-quarter average. However, it is still well below the 50 level that would signal a return to growth.

Another good lead indicator of activity, the EC’s economic sentiment index, also picked up in May, after having fallen back in March and April. This index too, though, remains at levels consistent with falling GDP.

Meanwhile, the key German Ifo and French Insee business sentiment indices both also rose in May, recovering some of the ground lost in the previous two months. Both indices, though, remain at low levels. Meantime, retail sales got off to a weak start in the second quarter, declining by a marked 0.5% in April.

Lending to eurozone businesses and households also remains very muted. The annual growth rate of loans to the private sector continued to contract in April, declining by 0.9% year-on-year, as the economy continues to deleverage.

There has been a pick-up, though, in industrial production recently.

There are expectations that a modest economic recovery will commence in the second half of 2013, helped by stronger global growth, a fall in inflation and the accommodative stance of monetary policy.

Nonetheless, GDP looks set to contract by around 0.5% in 2013 for the second year in a row.

Modest growth of around 1% is expected in 2014. It will require much stronger growth than this to bring down the high level of unemployment.

However, with official interest rates already very low, the ECB seems to feel that it has done its bit in terms of stimulating growth. As expected, it left its policy unchanged at this month’s council meeting. Monetary policy is only likely to be eased further if the economy remains stuck in recession.

Maybe it’s time to ease fiscal policy instead.

* Oliver Mangan chief economist AIB

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