Recovery in Euro Area Seen Falling Behind Schedule

After promising data in the third quarter of 2009, the Euro Area economy expanded by only 0.1% in the last three months of last year. And if it wouldn't be for France's 0.6% growth, the common currency zone would most likely record a contraction.

The weaker than expected GDP data can be attributed to disappointing consumer spending in most member countries, caused mainly by a spike in the unemployment rate. In fact, the euro zone's jobless rate reached 9.9% in October, the highest since August 1998. Contributing to these bad numbers are Spain which registered almost 20% of the workforce without a job and Ireland where the jobless rate more than doubled in the last two years. In addition, in the second half of 2009, the euro appreciated significantly against major currencies, thus making it difficult for European firms to compete. In the last quarter of 2009, exports were down 8% comparable to a year earlier and 12% to the last three months of 2007.

Looking ahead, we expect GDP growth to remain below trend in the first quarter of 2010. Indeed, business and consumers surveys released recently are indicating sizable divergence between the recovery in manufacturing and service sectors. While we can see improvements in the first one due to export growth supported by global upturn and depreciating euro, the services and retail sales are falling behind due to the end of fiscal stimulus and fragile consumer spending.

Anna Fedec,
3/3/2010 5:44:02 PM