Eurozone turning a corner as recession set to end
Tuesday, August 13, 2013
LONDON (AP) — The recession that’s gripped the eurozone since late 2011 is likely over.
On Wednesday official figures are expected to show that economic growth among the 17 countries that use the euro inched up 0.2 percent in the April-June quarter compared with the previous quarter.
The increase is slight. But it would end six straight quarters of a debilitating recession — the longest to afflict the single-currency bloc since its creation in 1999.
And it would represent an encouraging sign for other economies, including the United States, the world’s largest, because the eurozone is the world’s biggest trading bloc. The eurozone’s recession held back growth in the United States, Japan and elsewhere as European consumers and businesses spent less on goods from those nations.
“Concerns about the eurozone were causing a lot of companies to put investment on hold,” said David Owen, chief European economist at Jefferies International.
The eurozone’s recession was a byproduct of the debt crisis that engulfed the currency union in 2010. The crisis forced debt-laden governments to impose painful cuts, spooked investors and raised doubts about the viability of the eurozone. Shrunken government spending and higher taxes devastated living standards in much of the eurozone, slowed economies and drove the bloc’s unemployment rate to a record 12.1 percent.
The austerity programs embraced by the most troubled eurozone countries contrast with more expansionary efforts in the United States. The Federal Reserve has also been more active than the European Central Bank in helping the economy. It drove borrowing rates to record lows once the financial crisis erupted in 2008. Ultra-low U.S. rates helped boost stock prices and home sales. U.S. unemployment has dropped to 7.4 percent from 10 percent in late 2009 despite a subpar economic recovery.
In recent months, the picture has brightened in Europe as well as governments have shifted their focus away from debt reduction. Industrial production is rising. Consumer spending has stabilized. Exports have increased as key trade partners, including the United States and Japan, strengthen.
Confidence has also recovered as stock and bond markets have rallied. That’s partly due to the European Central Bank’s pledge a year ago to do “whatever it takes” to save the currency union and its decision to cut its main interest rate to a record low of 0.5 percent.
In Spain and Italy, for example, government borrowing rates have sunk in the past year, a sign of investor confidence. Analysts expect Wednesday’s figures to show improvement in both countries, though both are likely to have remained in recession.
Investors have bid up stock prices in key eurozone countries this year. Stock indexes in two major economies — France and Spain — have reached 52-week highs. France’s CAC 40 stock index has jumped 12 percent this year and Spain’s IBEX 7 percent. Germany’s DAX index is up nearly 10 percent this year and Italy’s FTSE MIB nearly 7 percent.
Whatever growth is reported for the eurozone Wednesday is unlikely to be evenly spread out across the bloc. The strongest economy, Germany, is expected to post quarterly growth of 0.6 percent, thanks to its high-value exporters. Others continue to languish under the burden of austerity policies.
Unemployment remains at stunning highs in some countries — more than 26 percent in Greece and Spain, with youth unemployment of around 60 percent. Youth unemployment, in addition to hindering economic growth, is thought to contribute to crime and political extremism.
“While welcome news, much of the return to growth is likely to be driven from Germany, which is likely to be cold comfort to countries like Spain, Italy and Greece buckling under crippling levels of debt and unemployment,” said Michael Hewson, senior market analyst at CMC Markets.
Few economists think the indebted countries can start producing German-style levels of growth in the coming years. Burdens from expensive public financing and unemployment will likely continue to weigh on their economies.
Yet for many people, even a mild improvement is cause to celebrate, however tentatively, and a suggestion that the darkest days are in the past. As confidence rises that the eurozone will expand, companies will be more likely to open factories and retail space and consumers will be more likely to spend.
Companies in the United States, which send 17 percent of their exports to the eurozone, stand to benefit.
“This will be good for the U.S. economy,” said Sung Won Sohn, an economics professor at the Martin Smith School of Business at California State University. “We could see a gradual increase in sales to Europe of everything from Napa Valley wine to U.S. airplanes.”
AP Business Writers Martin Crutsinger in Washington and Steve Rothwell in New York contributed to this report.
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