Stuttering Eurozone in 2014: Call This a Recovery?

Written by | Monday, January 6th, 2014

Many economists now predict that 2014 will be a good year for the economic growth in the United States. Some forecasts predict that the country will hit a growth rate record unheard of since 2005. Unemployment rate is anticipated to be below 7 percent, the lowest figure in at least five years. Even though jobs are not yet abundant, their creation is proceeding at a steady pace. Energy sector is booming again and the Federal Reserve has been regularly updating its forecasts for the next year’s recovery since June. In short, the US economy is once again gaining momentum.
In Europe, the picture is somewhat different. After Cyprus was granted its next IMF installment, Standard&Poor has decreased the eurozone’s rating from triple-A to AA+, and the Eurostat announced that the currency block “grew” by 0.1 percent from July to September – all in all, Europe’s recovery seems to be losing steam. Although many wish for only good news on the economic front throughout 2014, the new data suggests that the recovery might be paltry – as some have already vividly described the struggle of Europe to catch up with its transatlantic brother.
A chapter in the Eurostat’s latest forecast is called “overcoming headwinds” but it is not yet sure who is to overcome and what headwinds. According to the latest figures, the eurozone might expect a growth rate of 1.4 percent next year, while the United States is to grow by 2.6 and the world by 3.9 percent. Joblessness is expected to remain slightly above 12.1 percent in the eurozone, but Greece and Spain might anticipate about a fourth of their workforce to remain without jobs. The lowest unemployment rate is to be cherished by Austria followed by Germany who can expect joblessness of only 4.2 and 5.6 percent respectively.
Although expectations of growth do not seem to have won audiences so far, the composition of growth might suggest positive changes behind the fragile process of re-gaining momentum which was lost about half a year ago. Important drivers of growth, as expressed by percentage change compared to the last period, are expected to be export and import of goods and services, followed by gross capital formation and final demand. In other words, international trade and impetus in global markets may mean better tomorrows for Europe as well.
Despite moderate growth of advanced countries, parts of emerging and developing world have significantly contributed to an increase of the global economic stability. Importantly, commodity prices are hoped to settle down after the volatile year of 2013, which would mean that food-crisis now has smaller chances of materializing. The current average oil price – 114 USD/bbl – should decrease next year, which could further reinforce commodity and energy markets. If the European Union manages to intensify its trade relations with the rest of the world, international trade and supportive global conditions might help stabilize positive growth forecasts. This strategy could be used by the time the EU28 manages to regain its own internal balance that could eventually kick-start a more trustworthy recovery.
Credibility is important because until the internal turmoil is over, investors are not likely to believe in stories of recovery. This is crucial because without the confidence that a full-fledged recovery is underway, companies can be hesitant when it comes to creating new jobs. Unfortunately, though, businesses are already being additionally discouraged by Europe’s rigid and overprotective labor laws, which effectively prevent companies from hiring new people. Unemployment does also remain a worry. As Pier Carlo Padoan, the chief economist of OECD put it, “if unemployment does not fall back significantly there is a number of negative effects: fewer people in work means less income consumption, less demand growth and much lower confidence. All these things together put a further burden on the recovery.” Reminds of a vicious circle? It can very likely be so.

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