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What's holding the eurozone recovery back?

November 14, 2013
Associated Press

LONDON (AP) — The 17-country eurozone has just emerged from recession — yet already its recovery is faltering.

Official figures on Thursday showed the currency union's economy grew just 0.1 percent in the July through September quarter compared with the previous three-month period.

The figure confirms the bloc faces a long and painful way back from its five-year financial crisis. Record-high unemployment is keeping consumer spending weak, a stronger euro is slowing exports and governments are still more focused on cutting debt than investing.

The chronic weakness of the world's largest trading bloc is helping slow the global economy: Struggling Europeans, for example, are buying fewer goods from the United States and elsewhere.

At the same time, disparities divide the region. Germany continues to grow while France, historically the other half of the union's "core", saw its economy contract.

Here's a look at the eurozone's vital signs.

— LABOR MARKET IN THE DOLDRUMS

Record-high unemployment across the eurozone is one of the key reasons behind the muted recovery. At the end of September, the unemployment rate in the eurozone stood at a record 12.2 percent. Nearly 19.5 million people were out of work across the bloc, which has a population of around 330 million.

The overall figures hide huge differences across the region.

While unemployment in Germany, Europe's largest economy, is near record lows, it has jumped to massive levels in the countries struggling with high debt. The rates in Greece and Spain have spiked above 25 percent and are not forecast to drop significantly for years. The situation among the young is even worse — in Greece, a staggering 57.3 percent of those under 25 were out of work.

As well as creating uncertainty in households and stifling consumer spending, unemployment is a burden to a country's coffers. Soaring youth unemployment also has the social cost of denying potential workers skills and experience — hurting the region's economic potential in the long term and fueling social tensions.

"There's no reason to be joyous," said Bob Gogel, CEO of Integreon, a global legal outsourcing firm.

— RISK OF DEFLATION?

One offshoot of high unemployment is that it keeps a lid on wages. That affects a household's ability to spend, especially in a time of austerity — tax increases in many indebted countries are already a drag on income.

As a result, shoppers are putting off big purchases and looking for bargains. Retail sales have yo-yoed in recent months, despite the emergence from recession.

That's caused retailers to lower prices to lure more buyers, leading to a drop in inflation. At last count, consumer price inflation was just 0.7 percent in the year to October, far below the 2 percent target.

While lower prices are, in theory, good for consumers, there is the risk they could encourage shoppers to put off purchases in the hope of getting better deals at a later date. Such a downward spiral of dropping prices and weaker spending — called deflation — has blighted Japan's economy for the best part of two decades.

Few economists see a risk of deflation. But the European Central Bank doesn't appear willing to take any risks — last week it cut its benchmark interest rate to a record low of 0.25 percent. It has indicated it stands ready to take other measures — such as more cheap loans to banks or pumping money into the economy — should inflation fall further in the months ahead.

— INDUSTRY STRUGGLING WITH STRONG EURO

Even though the eurozone has been in a financial crisis and in recession for much of the past five years, the euro has remained fairly buoyant, especially since last year's commitment by the ECB to do "whatever it takes" to save the currency.

In fact, it's spent much of the past five years trading above its long-run average, particularly against the dollar, which has been weakened by the Federal Reserve's policy to pump trillions of dollars into the U.S. economy. The ECB has refrained from any such monetary stimulus and that's helped shore up the euro — even when many commentators were forecasting its demise.

It was trading near two-year highs above $1.38 as recently two weeks ago. The strength, particularly this year, has raised concerns that exporters might suffer. That was confirmed in figures released Thursday that showed German big exporters suffered during the quarter, dragging growth down. Across the eurozone as a whole, industrial output fell modestly.

Even so, many economists think the industrial sector will be the main driver of growth over the coming months, partly because it can tap into demand from better-performing countries outside of Europe.

"The main growth driver should be stronger exports, particularly to the U.S. and emerging economies," said Zach Witton, an economist at Moody's Analytics.

— COMPANIES SEE BETTER TIMES AHEAD

Like governments and households, companies have spent the past few years shoring up their finances. Battered by recession that has crimped demand for years, they have been reluctant to invest in their businesses or splash out on acquisitions to expand operations as they focused on paying down debts and rebuilding their cash positions.

However, there are signs that companies are becoming more optimistic. A recent survey showed companies are increasingly looking at how to expand their businesses. And in recent months, surveys of business managers pointed to an increase in economic activity. The purchasing managers' index published by financial information company Markit has risen back above the 50 threshold that indicates expansion.

— DEBT STILL A PROBLEM

The eurozone's long-term performance is linked to its ability to reduce its debt. One of the reasons the eurozone struggled to get out of recession was that governments worried about debt aggressively began cutting spending and increasing taxes. That hurt growth, dented consumer confidence and sent unemployment sky-rocketing.

Eurozone countries — even Greece — have mostly completed their austerity measures. But it will take more time for governments to reap the rewards of those measures. Budgets remain in deficit, causing public debt to keep inching higher — to 93.4 percent of annual GDP.

The deficits are also unlikely to improve significantly until economic growth picks up, providing government with more tax revenue. Based on Thursday's figures, progress is likely to be slow.

— YET MARKETS ARE BOOMING

Despite all this, stock markets are booming. Germany's DAX, for example, has hit a record high. Indexes across the eurozone are posting solid gains.

One reason is that few investors now think that the euro will break apart. U.S. bank Citigroup, which is credited with coining the term "Grexit" to describe the possibility of Greece's departure from Europe's single currency, now says it's unlikely.

 
 

 

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