As the talks of a recovery in Europe continue, the search for tangible evidence of that recovery intensifies. So far, the evidence is that the recovery is basically limited to wishful thinking. But since I am an economist and a scholar, not a pundit, I always prefer to rely on facts, theory, experience and methodologically good analysis in a prudent combination. Therefore, when people persistently claim something I disagree with, I take the opportunity from time to time to question my own position.
Today is one of those days. Alas, the question: is there really no recovery under way in Europe?
Since we have already, in vain, looked at GDP growth to try to find any signs of better times ahead, let us broaden the search a little bit. The largest share of GDP – in a healthy economy – is private consumption. It should constitute 70-80 percent of GDP, though because of the heavy reliance among European countries on exporting their production (rather than satisfying needs at home) many EU states tend to have gross exports that exceed private consumption.
But even when consumption is smaller than gross exports, it is still a good indicator of how strong the domestic economy is. Therefore, it also serves as a good indicator for where the economy is heading in general.
To find out more about how (un-)willing European consumers are to spend money, we turn to Eurostat’s national accounts data. While annual numbers are usually the most solid base for long-term trends, in this case quarterly data can serve us better. We can concentrate on a short period of time, 2008-2013, and still get a relatively large series of observations (24 in all).
Here is what we find:
1. In order to build a bridge back to the previous analysis of GDP growth we need data of the same quality that covers both GDP growth and growth in private consumption. A total of 19 EU member states report such data, which happens to be not seasonally adjusted but adjusted for inflation.
2. Growth is measured over the same quarter in the previous year. This minimizes the influence of artificial swings caused by the political whims of lawmakers during a fiscal year. Also, the reported numbers are unweighted averages for these 19 states. A weighted average would of course be better, but for the purpose of a blog it is not worth the extra time to add weights.
3. Last year, 2013, was not a particularly strong growth year. Of all the 24 quarters studied, eight quarters were better than any of the quarters of 2013. The fourth quarter of that year saw consumption grow by 0.74 percent, half as good as the third best quarter of the perioid (Q2, 2011, 1.5 percent). The remaining three quarters of 2013 rank 13th, 14th and 20th. Not exactly screaming of a recovery.
4. Every quarter in 2011 saw stronger growth than any quarter of 2013, with growth rates ranging from 0.96 percent to 1.32 percent.
5. In fairness, it is worth comparing to 2009, which was an absolutely abysmal year. Consumption contracted between 2.42 and 3.83 percent. In other words, while 2013 was not exactly a year to be jubilant about, it also wasn’t a disastrous year. Just an average year of economic stagnation: the average quarterly growth rate for private consumption in 2013, for the reporting 19 EU states, was -0.12 percent.
Long story short: no recovery under way. As a reinforcement of this point, consider the following chart:
The close correlation between the growth rates of consumption and GDP has an obvious explanation in the fact that, again, private consumption is its largest domestic spending item. But there is an important point buried in this correlation: consumer spending is a large driver of GDP growth. This means that prosperity in general depends heavily on consumer sentiment.
As reported above, 2013 was by no means a remarkable year for consumer spending. While each quarter saw a slightly higher rate of growth, this does by no means constitute a recovery. The upswing during 2010 was notably stronger, and led to a top growth rate of 1.5 percent in the second quarter of 2011. After that peak, growth turned negative again for four consecutive quarters and has not yet reached one meager percent since then.
Until consumer spending reaches the levels it had before the Great Recession (at least 2.5-3 percent per year) there will be no recovery in the EU. Consumer spending, in turn, is held back by high taxes and unpredictable entitlement programs. A stable, confidence-inspiring fiscal policy is the first step toward a recovery. Beyond that, there is a lot Europe’s governments need to do, but that is a story we can get back to once we actually see a recovery in Europe.