Recession in Europe Oh, really?
Written by A Forex View From Afar on Monday, September 15, 2008Recession in Europe Oh, really?
It has been discussed previously that the Euro-area does not have precise definitions of a recession. As such, analyst and economist have “imported” from the other side of the pond the rule of the thumb when it comes to declaring a recession: two or more consecutive quarters with negative GDP growth. However, NBER, the organization which provides the start and end dates for any recession in the U.S., defines a recession as “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales”. From that point of view, the ‘two negative quarters’ read is a little too subjective to call for a recession, especially in the current environment.
Judging from the official definition of a recession, the question may be how close the Euro-zone looks to be to having a recession. In the euro-area, unemployment has been in a clear downtrend for more three years, dropping from 9% to 7.1% over this period. Nevertheless, the recent releases showed a slight increase in the unemployment rate. The latest read, for July saw a 7.3% number, with the biggest rise in unemployment seen in Spain and Ireland, the areas famous for their housing boom and bust. This really points to a dynamic labor market, rather than a recessionary outlook.
The money supply numbers, the M3, is up over 9% from one year earlier. This year the growth rate had reached a little over 12%, the highest rate touched since the 80’s. Even if the growth rate has been tempered there is still very strong growth in money supply in the Euro area, a fact regularly cited in the ECB’s press conference and speeches. Going further, the investment rate of non-financial corporations is unaffected, remaining stable at 23.2%, and rising since 2003. Non-financial corporations’ profits share had reached risen almost 39%, slightly dipping from the end of 2007. These show corporations still are resilient to some extent to the global slowdown.
The trend for industrial production in the Euro-area has recently changed. At the beginning of 2008, industrial production topped and now the index has begun sliding lower. In July, industrial production fell 1.7% from one year earlier. This still does not denote a recession it is imminent, but it shows that production output has hit the apex. Overall, the “core” data still shows the Euro-area is far from in a recession. A drop of a little more than 1% from the previous year is nothing to be extremely concerned about in the context of global growth.
The problems in the Euro-area come when we look at the Expectations indexes and surveys. Most of them are near multi-years lows, while others suggest both the manufacturing and service sector expectations are contracting. This can be interpreted as normal because of the global slowdown, but, if things do not start to get on the right path soon those expectations will actually be materialized. Only then we will be able to speak of a recession; until this happens we have a slowdown, but a recession by the book’s definition? Not really.
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