Euro Area Economic Recovery Looks Fragile

The Euro Area GDP shrank only 0.1% in the second quarter of 2009, according to data released this week. But is it really a good idea for politicians to be excited about growth below trend? Moreover, can one economist forecast that the Eurozone is on the brink of a major economic recovery? Probably not.

Indeed, when comparing Q2 of 2009 with the second quarter of 2008, one can easily see that we are still getting a significant 4.6% contraction. In addition, last quarter’s smaller than expected deterioration seems mostly due to growth recorded in just two countries, Germany and France, which account for almost 50% of Euro Area economy.

That said, to have broader perspective of the health of the euro zone economy one should put more attention to the next largest European economies Spain and Italy which account for about 30% of the Euro Area wealth. In fact, Italy’s GDP fell 2.7% in the first quarter of 2009 and 0.5% in the second and its very unlikely that the government will provide significant fiscal stimulus due to already high public debt. Also, exports are hurt not only by weak foreign demand but also by high wages and a strong euro. The outlook for Spain doesn’t look good either. The Spanish economy contracted 1% in the second quarter after a 1.9% deterioration in the first quarter. Sadly, growth in Spain had been driven mostly by construction activity and real state speculation and since the credit bubble busted there is nothing left to boost the fourth largest economy in Europe. To make things even worst, Spain has the highest unemployment rate in Euro Area (18 percent).

Anna Fedec,
8/14/2009 12:17:58 PM