Eurozone economic recovery: Humming along just fine

Refet Gürkaynak, Philippe Weil

This column presents the first bi-annual report from CEPR’s Euro Area Business Cycle Dating Committee on the state of the Eurozone business cycle. The main findings are that the Eurozone expansion is continuing slowly, but is creating employment at a rapid pace; the recovery is commensurate with the US recovery once the Eurozone’s double-dip sovereign debt recession is factored in; and the heterogeneity in the pace of recovery of individual member countries is driven by the heterogeneity in their recessions.

The CEPR Euro Area Business Cycle Dating Committee published on 7 August the first of its bi-annual regular reports on state of the Eurozone business cycle.1 It made three important points. First, the Eurozone expansion is continuing, admittedly slowly but creating employment at a rapid pace. Second, although lacklustre, the Eurozone recovery from the Great Recession is commensurate with that of the US once the Eurozone double-dip sovereign debt recession is factored in. Finally, the heterogeneity in the pace of recovery of individual Eurozone member countries is driven by the heterogeneity in their recessions.

A lacklustre expansion that creates jobs fast

The Eurozone expansion is continuing, albeit at a lacklustre rate, but it is creating employment at a quite rapid pace. It is now 17 quarters into the expansion, which began with the trough in 2013Q1. The previous, pre-crisis 2008Q1 GDP peak was finally surpassed after more than seven years on 2015Q3. Figure 1 shows Eurozone GDP with shaded bars for recessions.

Figure 1 Eurozone GDP from 1995Q1 to 2017Q1

Note: The red line is GDP index (2013Q1 = 100) and the shaded areas represent the recession periods as dated by the Committee. Changing Eurozone composition, that is, EZ11 from 1995, EZ12 from 2006, EZ13 from 2007, EZ15 from 2008, EZ16 from 2010, EZ17 from 2010, EZ18 from 2014, and EZ19 since 2015.

Data source: Eurostat and Committee computation.

Figure 2 shows post-trough trajectories of previous Eurozone expansions. The current expansion (in red) is obviously the slowest the Eurozone has witnessed. However, the timid recovery speed from recessions induced by a financial crisis is a well-known phenomenon (e.g. IMF 2009, Chapter 3) which is neither specific to the Eurozone, nor to the latest financial crisis.

Figure 2 Eurozone GDP: Recoveries comparison

Note: The figure shows a comparison of GDP in all the expansion periods dated by the Committee in the Eurozone. The solid lines are real GDP computed as an index, with reference period the quarter of the different troughs. On the x-axis, the number of quarters after the troughs are shown. The first two series (red and dark blue lines) refer to changing Eurozone composition, while the other ones refer to EZ19 fixed composition.

Data sources: Eurostat, AWM Database and Committee computation.

Although Eurozone GDP is recovering slowly, it is remarkable that employment is being created at a rapid clip that surpasses both the current rate of growth in GDP and the rate of employment creation in previous expansions (see Figure 3 for the latter comparison). This means that the steep employment losses from the double-dip recessions are being reversed at long last. However, the counterpart to the outpacing of GDP growth by employment growth is that productivity is so far sagging during this recovery.

Figure 3 Eurozone employment (in persons): recoveries comparison

Note: The figure shows a comparison of employment in all the expansion periods dated by the Committee in the Eurozone. The solid lines are employment (in persons) computed as an index, with reference period as the quarter of the different troughs. The number of quarters after the troughs are shown on the horizontal axis. The first two series (red and dark blue lines) refer to changing Eurozone composition, while the other ones refer to fixed EZ19 composition.

Data sources: Eurostat, AWM Database and Committee computation.

The Eurozone and US recoveries are commensurate

The second, and not widely appreciated point noted by the Committee is that, although the current Eurozone expansion is lacklustre, it is commensurate with the US expansion that followed the financial crisis.

It is important to remember that the US only had a financial crisis-induced recession, while the Eurozone experienced shortly thereafter a second ‘double-dip’ recession (see previous Committee findings) due to the Eurozone sovereign debt crisis. Hence, the US and Eurozone cycles are out of synch, and one should take that desynchronisation into account when comparing the strength of recoveries.

Figure 4 does precisely that by comparing the US and Eurozone GDP trajectories since their latest trough (instead of calendar dates). The US expansion has been going on for longer (as there is no counterpart to the euro sovereign crisis in the US), so only the first 18 quarters of the expansions can be compared. And that comparison shows that the Eurozone expansion in this cycle has been very close to US one so far. Hence, the lacklustre recovery from the financial crisis and the ensuing slump is not unique to the Eurozone or its economic policies.

Figure 4 US versus Eurozone GDP

Note: The figure shows a comparison between the two latest expansion periods for the US and the Eurozone. The red line is the EZ real GDP computed as an index (2013Q1=100) for the period 2013Q1-2017Q1; the blue line is US real GDP computed as an index (2009Q2=100) for the period 2009Q2-2017Q1. The number of quarters after the troughs are shown on the horizontal axis..

Data sources: Eurostat, Fred Database and Committee computation.

Different recessions, different expansions within the Eurozone

Although the Committee does not study individual cyclical behaviour across Eurozone countries, it did take a quick look at country experiences to understand where the Eurozone is doing better. Figure 5 shows the behaviour of GDP for the Eurozone and its five largest constituent countries around the cyclical trough.

The current heterogeneity of expansions is striking, but it reflects the past heterogeneity of recession: some countries experienced deeper troughs than others. For instance, Spain, which had a much worse recession than Germany and began to recover much later, is now growing faster. This can be interpreted either as meaning that countries simply revert back to their original GDP trajectory, and thus grow faster if they contracted faster, or it could be the result of policies adopted in the worst-hit countries to counter the recession. The raw data do not discriminate between these two possibilities, which each bear very different policy implications.

Figure 5 Eurozone countries’ GDP

Note: The figure shows real GDP series for the Eurozone (red line) and the five largest member countries (Germany, France, Italy, Spain, Netherlands) computed as indices (2013Q1 = 100), for the period 2010Q3-2017Q1. Country weights are based on 2011 GDP.

Data source: Eurostat and Committee computation.

Figure 6 shows that a similar cross-country heterogeneity is evident in employment as well. While Spain is increasing its employment much faster than other countries, its unemployment rate remains higher because it is closing a much larger employment gap.

Figure 6 Country employment (in persons)

Note: The figure shows employment (in persons) for the Eurozone (red line) and the five largest member countries (Germany, France, Italy, Spain, Netherlands) computed as indices (2013Q1 = 100), for the period 2010Q3-2017Q1. The time series are seasonal and calendar adjusted, except the employment for France is seasonal but not calendar adjusted. Country weights are based on 2011 GDP.

Data source: Eurostat and Committee computation.

To sum up

The Eurozone is experiencing a slow (but sustained) recovery, but this sluggishness is not atypical after financial crisis-led recessions. The speed of recovery since the last trough matches that of the US. Thus, the sluggish expansion so far does not seem to be a euro-specific disease.

Authors’ note: The authors are member and chair of the CEPR Euro Area Business Cycle Dating Committee, but the views expressed here do not necessary represent the views of the Committee.

References

IMF (2009), IMF World Economic Outlook 2009.

Endnotes

[1] The Euro Area Business Cycle Dating Committee’s primary remit is to establish an authoritative chronology of Eurozone recessions and expansions. At its March 2017 meeting in London, the Committee decided to also begin reporting twice a year on the current state of the Eurozone business cycle.