Recovery in Europe likely to drag down economy

Europe continues to be a drag on the rest of the world’s economy while the U.S. and China aren’t helping matters much either given their slowing growth.

Liz Alderman wrote for the New York Times that Europe’s growth is anemic and will likely continue to be a drag on the rest of the world:

Despite recent optimism that Europe’s economy is finally turning a corner, a stark reality remains: The situation is still fragile.

By many accounts, the euro zone has been rebounding from a wrenching double-dip recession that began in 2008 after the fall of Lehman Brothers. Financial markets have been in a celebratory mood, driving down borrowing costs for even the most troubled economies in recent months, while politicians have declared the worst of the crisis is over.

But the uneven nature of the recovery — between a group of strong countries in the north and a larger swath of weak nations in the southern rim — has made it difficult for the overall economy to gain momentum.

Growth in the currency union rose 0.2 percent in the first quarter, which translates to an annual growth rate of 0.8 percent, according to data released on Thursday by Eurostat, Europe’s statistics agency. While it was the fourth straight quarter of expansion, it was half what economists expected.

The growth is so feeble that it could be years before Europe truly recovers. The overall euro zone economy is still more than 2 percent smaller than it was before the crisis hit. And the pace of recovery, economists say, is even slower than it was after the Great Depression of the 1930s.

Despite the lackluster numbers, Germany posted better than expected gains according to a story posted by CBS News:

Germany, the eurozone’s biggest economy, was a star performer with growth of 0.8 percent over the previous quarter, better than analysts had expected. But that couldn’t overcome zero growth in France, which had been expected to turn in at least a 0.2 percent increase. Between them, the two economies make up roughly half of the eurozone economy.

A dismal 1.4 percent contraction in the Netherlands and a 0.1 percent decline in Italy did not help, either.

Compared to the same quarter a year ago, the eurozone economy grew 0.9 percent.

The stage is now set for further action by the European Central Bank.

The ECB could cut its benchmark interest rate from what is already a record low of 0.25 percent. It could also impose a negative interest rate for money banks deposit at the central bank, a step aimed at increasing loans to households and businesses. The ECB could also purchase government or corporate bonds on financial markets to add to the supply of money in the economy.

Angela Monaghan wrote for The Guardian that not every economy was terrible, but there were few bright spots:

There was a huge divergence in fortunes, with Germany growing at the fastest rate of all 18 countries, with gross domestic product increasing by 0.8%. It followed 0.4% growth in Europe‘s largest economy in the previous quarter.

The pace of recovery also accelerated in Spain, with growth of 0.4% outpacing a 0.2% increase in GDP in the previous three months.

At the bottom of the pile was the Netherlands, which suffered a shock 1.4% contraction in GDP, reversing 1% growth in the previous quarter. Portugal’s economy shrank by 0.7%, following growth of 0.5% in the final three months of last year.

The French and Italian economies were also dealt a blow, with zero growth in France and a 0.1% contraction in Italy in the first quarter. It followed 0.2% growth and 0.1% growth in the fourth quarter of 2013.

Dutch statistics officials said the sharp fall in GDP was largely driven by lower household gas consumption due to the very mild winter.

The Wall Street Journal story by Brian Blackstone, Jon Hilsenrath and Marcus Walker pointed out that the U.S. and Chinese economies aren’t producing growth to pull the rest of the world up either:

Five years after the financial crisis ended, soft growth in Europe, a stop-and-start U.S. recovery and waning momentum in China have policy makers groping for what to do next.

A spate of worrying economic data Thursday shook stock and bond markets. Economic activity in the 18-country euro zone expanded at a weak annual rate of 0.8% during the first quarter, data released Thursday showed. Excluding Germany, which grew at a robust 3.3% pace, the rest of the euro-area economy contracted slightly during the quarter.

European Central Bank officials are now moving toward enacting additional low interest-rate policies to prevent the region from sliding into a lengthy period of economic stagnation, while the U.S. Federal Reserve guardedly tries to wind down a bond-buying program meant to revitalize economic growth.

Meantime, Chinese authorities are trying to prod banks to lend more to first-time home buyers shut out of their real-estate market. U.S. officials privately say they expect Chinese officials to act to boost their economy and support banks if growth slows severely, though Chinese officials say they will avoid major stimulus if it undermines economic overhauls or deepens credit woes.

The numbers aren’t great, but there’s little room for central bankers to maneuver at this point. The global economy continues to flounder along with little signs it’s going to start growing again.