Economist Carl Weinberg calls it a depression.
The combined gross domestic product of the 17 countries that use the euro shrank 0.6 per in the fourth quarter from the previous three months, and now has declined for five consecutive quarters.
Unlike Canada and the United States, the GDP of the euro area is smaller than it was before the financial crisis. With unemployment high, credit tight and government spending limited, there is little reason to expect significant improvement.
“We are growing more cautious about Europe,” analysts at Pavilion Global Markets said in a research note Thursday, citing, among other things, the collapse in demand in peripheral countries such as Greece and Portugal, where governments have implemented severe spending cuts to avoid default.
Depression is a loaded, poorly defined term when applied to economics. But that takes nothing away from what Mr. Weinberg, the chief economist at research firm High Frequency Economics, is highlighting. The latest European GDP figures – coming on the same day that the world’s third-largest economy, Japan, also reported an economic contraction at the end of 2012 – certainly are depressing.
The data should make for a glum mood when policy makers from the Group of 20 economic powers gather Friday in Moscow for a two-day meeting, and could reinforce a U.S.-led push for the club to refocus its energies on economic growth.
A couple of years ago, the emphasis was on restraint. Fooled by the false dawn of an economic recovery that never really took hold, the G20 leaders in 2010 said they would halve budget deficits by this year and stabilize or reduce the growth of their debts by 2016. Those commitments were watered down at the end of last year, and they could be further diluted in Moscow.
The G20’s assertion in 2010 in Toronto that “sound” budgets are “essential to sustain recovery” now sounds overly doctrinaire, if not naive in believing the crisis had been conquered.
Take Germany. Hailed not so long ago as an economic marvel, the country now has the look of an export-dependent emerging market whose prospects rise and fall with global demand.
Germany’s GDP declined 0.6 per in the fourth quarter despite recording an impressive trade surplus. Only the headline GDP figure was released Thursday; details will come later. Those details likely will show the pernicious effects of fiscal austerity and underwhelming household demand. If trade added to German growth, then domestic demand must have been incredibly weak.
And that’s Europe’s strongest economy. French GDP dropped 0.3 per cent in the fourth quarter, confirming that the euro area’s second-largest economy managed only a single quarter of growth in 2012. Italy’s GDP plunged 0.9 per cent in the fourth quarter.
Those figures quite likely will put Europe’s leaders on the spot this weekend in Moscow. Japan’s new leader, Shinzo Abe, and the central bank are moving aggressively to jolt their country out of its economic doldrums. The Bank of Japan, for example, has raised its inflation target to 2 per cent and plans to expand its asset-purchase program. Mr. Abe wants the central bank to do even more, and can assure it does when he chooses a new central bank governor in the spring.
The yen has fallen sharply in anticipation of a lengthy period of loose monetary policy, to the irritation of some of Japan’s trading partners, who grumble that a weaker yen also is one of Mr. Abe’s goals. (The Bank of Japan denied Thursday that it is targeting the currency.)
But the grumblers have a weak case, as the Bank of Japan’s policies are not much different from those of the U.S. Federal Reserve and the Bank of England. They also must admit that anything that sparks growth in Japan at this stage is, over all, a good thing.
If there is a diamond in this rough survey of the world’s major developed economies, it’s the United States, where a Labour Department report showed Thursday that initial claims for jobless benefits dropped to 341,000 in the week ending Feb. 9, significantly better than Wall Street’s consensus estimate of 360,000.
Still, that too says something about the depressing state of the global economy. The U.S. labour market is improving, but slowly. Most economists expect the unemployment rate will still be above 7 per cent at the end of the year. Business confidence remains fragile, as most companies are “more interested in paying down debt than they are [in] expanding their businesses right now,” Richard Hunt, president of the Consumer Bankers Association, said Thursday during a conference call with reporters.
If that’s true, there is a strong case that governments should rethink their own austerity measures. That is if they are serious about economic growth. There can be no growth without demand, and if banks and companies aren’t going to create enough of it, government is the only other option.