The euro-area economy … has probably seen its worst, but a strong recovery may be too much to ask for
Published on Economist.com, by staff, July 30, 2009.
AT THE beginning of June Jean-Claude Trichet, the head of the European Central Bank, set out its latest forecasts. Though the worst of the downturn had probably passed, he said, the euro-area economy would be unlikely to grow until the middle of 2010. Just a few weeks later Mr Trichet looks too gloomy. Figures published on August 13th are likely to show that GDP shrank again in the second quarter, but that this will probably be the low point.
More timely indicators suggest the economy has started to grow again. Businessmen are cheerier. The gauge of German business sentiment published by Ifo, a research institute in Munich, rose in July to its highest level for seven months. Confidence in France increased for a fourth straight month, according to a survey by INSEE, the national statistics agency. The brighter mood reflects orders and sales. Euro-zone industrial output rose in May for the first time since September. A broader index, based on surveys of purchasing managers in manufacturing and services, was much stronger in July.
This revival of animal spirits counts because so much of the downturn owed to a collapse in business spending. Firms slashed their capital budgets and pared back stock levels when their export sales collapsed. Foreign demand is now returning. Euro-zone exports to China rose by over 40% between January and June, according to Goldman Sachs. Shipments to India have also picked up. Orders in Germany are improving as its capital-goods firms benefit from infrastructure spending in Asia. The fresh signs of life in America’s housing market raise hopes that recession is lifting in Europe’s biggest export market …
… The longer-term fear is that unemployment will drag the economy back down. The risk is greatest in countries where job cuts have so far been modest. Compared with Spain, where a nasty construction bust has already put many out of work, the jobless rates in France and Germany have barely responded to lower output (see chart). German job losses have been stemmed by a government scheme that subsidises the wages of those on short-time working. Around 1.4m workers are receiving the short-time allowance. The reduction in labour supply because of the scheme is equivalent to some 400,000 full-time employees.
Such schemes cannot last for ever. Car firms and their suppliers have been among the keenest users of short-time working, anxious to keep skilled staff. Yet unless demand for cars stays high after “cash-for-clunkers” incentives fade, the car industry in Europe will need fewer workers.
Similarly, labour hoarding in France also comes at a cost. French firms in aggregate still spend more than they earn, despite cuts in investment. Action taken to bridge that gap while financing conditions are still tight would include job cuts. As in Germany, that process could be slow and rely more on hiring freezes than lay-offs, says Julian Callow at Barclays Capital. But it would weigh on consumer demand all the same. Although Europe shows signs of recovery, there are plenty of reasons to fear it will not be a robust one. (full text).