Germany and France are leading Europe out of recession with a fragile recovery driven by massive government spending, strong social safety nets and a crucial boost from Asia.
Both countries surprised markets Thursday by reporting their economies expanded in the second quarter.
The rebound, one economist noted, has a “made in China” feel to it as exports to that country, notably from France, are surging. The big question is whether those exports can be sustained.
Not long ago, there was a belief that Britain and United States would be the first big countries to climb out. They entered recession earlier than Europe and would therefore emerge first, and the Anglo-American economic model, distinguished by its flexible labour force, generally lower taxes and a lighter regulatory regime, was viewed as more likely to accelerate recovery.
So much for the theory. The gross domestic product of both Germany and France expanded by 0.3 per cent from the previous quarter, in contrast to economists' expectations that both would contract by 0.3 per cent.
The second-quarter growth comes after France's GDP sank by 1.3 per cent in the first three months of the year, while Germany's plunged 3.5 per cent – the most since quarterly data were first compiled in 1970.
But a strong rebound in Europe is far from assured. “The recovery is very fragile and thinly based,” said Gilles Moec, Deutsche Bank's senior European economist in London. “Yes, the recovery has started, but we don't think it will be that strong in the second half.”
The German reversal is good news for Europe in general and Chancellor Angela Merkel in particular. “Recession is over in Germany,” heralded UBS European economist Martin Lueck.
Germany is Europe's biggest economy and the world's biggest exporter of manufactured goods. When it slumps, the rest of Europe is usually not far behind. Indeed, the GDP in the euro zone, whose members share a common currency, fell by only 0.1 per cent in the second quarter – far less than expected – after dropping 2.5 per cent in the first quarter.
For the faster-than-expected French and German recoveries, one can credit not just stimulus spending and social safety nets, which ensure that fired workers retain some spending power. Also thank planes, trains and automobiles.
French transportation equipment – Airbus jets, trains, cars – to all export markets were the stand-out winners in the French economy. Exports of non-transportation goods actually fell. “The French car industry, which tends to specialize in fairly low-emission vehicles, is particularly well placed to benefit from the various ‘green' incentives offered to consumers,” Mr. Moec said.
But the euro zone's quick jaunt from deep to shallow recession can also be attributed, in good part, to fairly strong demand in China and other emerging Asian economies such as Indonesia and Thailand. Customs data show euro zone shipments to those countries rose 6.4 per cent in April and May, after a decline of 6.2 per cent in the first quarter.
Chinese buyers were especially kind to France. French exports to China rose 14.2 per cent in the second quarter, after falling 22.5 per cent in the first quarter.
Exports to countries in Southeast Asia rose an impressive 23.6 per cent. Mr. Moec said the exports to this part of the world probably padded France's GDP number by 0.2 to 0.3 per cent.
The potential bottlenecks to a sustained recovery are Asia's ability, or lack thereof, to maintain demand for European exports, rising European unemployment and the inevitable run-down on cash-for-clunkers auto rebate schemes. The wave of bankruptcies and corporate restructurings continue apace.
Thursday, German luxury clothing maker Escada, whose dresses are worn by Demi Moore and Paris Hilton, filed for bankruptcy protection. Arcandor, one of Germany's largest retailers, went bankrupt in June.
Drawn-out recessions in Britain, whose economy sank 0.8 per cent in the second quarter, Spain and Italy are a drag on overall European recovery. Some countries in Eastern Europe and the Baltic republics are still in crisis. GDP is falling in Latvia, Lithuania and Estonia. Hungary, Romania and Slovakia are also in trouble; Hungary's GDP sank 8.8 per cent in the second quarter.
Still, investors on Thursday focused on the surprise recoveries in France and Germany, while forgetting about the long list of ailing countries. Most European stock indexes rose between 0.5 and 2 per cent.
Mike Lenhoff, chief strategist in London for investment firm Brewin Dolphin, said the “favourable news flow means upward revisions to expectations for growth.” This, he said, could see the stocks continue to rise in spite of heady gains so far this year. Europe's Dow Jones Stoxx 600 index has gained 45 per cent since March.
The news also is good news for Ms. Merkel and her Christian Democrats, who face national elections Sept. 27. While she already had a slim lead in the polls, the newest GDP figure is expected to give her a boost.
The Merkel government is spending €85-billion ($132.2-billion) on stimulus measures, from infrastructure construction to the phenomenally successful cash-for-clunkers program. In a statement, Economy Minister Karl Theodor zu Guttenberg said: “By means of the stimulus packages, we put the economy on the right track so that the stabilization in the second quarter may turn into a sustained economic recovery.”
