Daily Management Review

The EU economy is steady in the West, and rapid in the East


05/20/2016


Eurostat has summed up the first quarter of 2016. EU’s GDP grew by 1.7 percent as a whole, while some countries experience a glut, and others are on the brink of recession.



EU economy welcomed 2016 with not very fast, yet steady growth. In the first quarter, the total GDP of all 28 EU countries increased by 0.5 percent compared with the previous quarter, and by 1.7 percent on an annualized basis, reported Eurostat. Germany, the continent’s leading economy, made the strongest quarter spurt over the past two years. Compared with the last three months of last year, it grew by 0.7 per cent.

Spain and Cyprus are reaping the fruits of reforms

After the crisis and successful economic reforms, Spain’s GDP continues to grow at 3.4% rate. At the same time, Italy has long been struggling to get out of recession. Now, it is still lagging behind with its modest 1.0%. The most important reason here is that the Italian agriculture is continuing to decline. France and the Netherlands showed an increase of 1.3% and 1.4% respectively. 

Thus, the progressive movement in the major Eurozone countries is increasingly aligning and synchronizing. The inconsistency of the debt crisis, when GDP grew in one EU’s large country yet declined in the other, is in the past now. This contributes to stabilization of the total GDP growth rate in 19 Eurozone countries. In annual terms, it is still below the rate of development in the whole EU (1.5% vs. 1.7%). However, if we take a look on qoq results, we can see that it finally caught up (around 0,5% in both).

Another former troublemaker country in the euro area is Cyprus. Along with Spain, it has successfully completed a program of reforms, and now is rapidly growing. During the last quarter, the island's economy expanded by 0.9%, for the year - by 2.7%. Portugal is significantly slower. The country also received financial aid and had reforms carried out, but the new left governments have begun their partial collapse. Here, quarterly growth was only 0.1%, and annual - 0.8%. 

Greece is on the brink of another recession, while it has already begun in Latvia  

The Portuguese economy at least continues to grow, but the GDP of Greece is shrinking again: 0.4% for the quarter and 1.3% for the year. This means that the only remaining recipient of European stabilization fund and the IMF’s aid has actually relapsed into recession. Formally, this is not yet so as Greece recorded minimum (0.1%) quarterly growth since the end of last year. The classic definition of recession says that it comes after two consecutive quarters of negative growth.

That is the case now in Latvia, where negative growth was recorded in the 4th quarter of the previous year (- 0.4%) and in the 1st quarter of the current (- 0.1%). However, the slowdown in the recession indicates that growth of the Latvian economy could resume in the current quarter. Neighboring Estonia marked the January to March period with zero. On the contrary, Lithuania has demonstrated acceleration of translational dynamics to 0.8% qoq and 2.4% yoy.

In general, the growth rate in Eastern Europe is usually substantially higher than in Western Europe, as the former socialist countries are catching up. However, the real surprise in the data package submitted to Eurostat was the sharp deceleration in Poland and Hungary. 

Braking in Poland and Hungary and acceleration in Romania

The Polish economy had just recently maintained a positive trend with a rate of 3-4 percent a year. Now, it suddenly showed a minimal, but still a negative quarterly result (- 0.1 %) and lowered the annual rate to 2.5%. Experts explain this mainly by completion of a number of programs within which the EU has provided billions of dollars in financial aid to Poland.

Apparently, the same effect is observed in Hungary, which has been growing at a rate of 2-3% in recent year. However, the inhibition was much more dramatic there: in the quarter, GDP declined by 0.8%. So the Hungarian economy is threatened with recession. We will see the outcome in mid-August, when Eurostat publishes the results of this 2nd quarter.

At the same time, the raise continues in other countries of Eastern Europe. It is pronounced the most in Romania, which joined the EU almost three years later than most of the other Eastern European countries. Romania has made in a quarter what Germany had made in a year: the country’s GDP increased by 1.6%. In annual terms, the Romanian economic growth accelerated to 4.2%. As a result, according to Eurostat’s report (which, for example, contains no data for Ireland), Romania is the growth leader in the European Union.

Slovakia and Bulgaria also shown high annual rates (3.6%) and (2.9%). And on the west of the continent, in the UK, which soon will hold the Brexit referendum, the annual growth rate is 2.1%. Thus, the British economy is now growing much faster than the economies of other major Western European countries, including Germany.

source: dw.de






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