Europe’s Awakening

A couple of weeks back, I picked on Americans – why, I asked, do they not see how well they are doing? Now, it’s Europe’s turn, although the question might appear to be the opposite: when, if ever, will they shrug off the baggage of the Great Recession? As such, this week’s title might seem out of place. If Europe is indeed awakening from something, what is it awakening to?

If one had slept through the Recession, they might think they were waking to a nightmare: near-impossible sovereign debts, on a number of fronts; a pulverized financial sector that is still trying to re-capitalize and re-regulate itself, seven years on; the psychological stress of a double-dip recession, with the tangible fallout of still-reticent consumers and business decision-makers; and sclerotic growth, the clearest evidence to most that Europe’s structural impediments have been and are today a daily constraint on activity – a new reality that everyone must simply adjust to.

Adjustment is a tall order, though, particularly for those tossed aside by the sluggish economy. There are enough of them that their discontent has triggered rising protectionism. This was very evident in the immediate aftermath of the recession, took on a more subtle form in the intervening years, but last week leapt onto centre stage with the eleventh-hour collapse of the Canada-Europe CETA free trade agreement talks. This comes amid a populist backlash against the Zone itself, manifested in the Brexit vote and various upcoming referenda on the Continent. Europe is asking very serious existential questions at the moment, ones that threaten what were thought to be the pillars of an architecture for future growth and prosperity. All told, a pretty messy set of circumstances.

But like Americans, could the Europeans also be blind to a renaissance in their own economy? Measured against accepted notions of ‘regular’ activity, it is arguable that Europe’s suppressed performance over the tough post-recession period has long since exhausted the excesses that built up ahead of the recession. That same sub-par performance is now creating a groundswell of pent-up demand, evident in the need for new housing and non-residential facilities. Builders are responding: in the last few months, permits for new construction are up between 10 and 20 per cent on a year-to-year basis.

Another measure of near-term intentions is the activity of purchasing managers. The index for purchasers in the construction industry is up sharply in recent months, although still shy of the late-2015 peak. Swing over to manufacturing, and the story is quite different; a recent jump puts the index level at its second-highest point in the post-recession period. Although the level itself does not suggest blockbuster growth, the trend is encouraging. Service-sector activity – a broader barometer of economic health – surged in October, but it’s still too early to see whether this will be sustained.

Any positive signals in the job market? Actually, there are. European progress on the employment front is about two years behind America’s, but thankfully, it’s on the same trajectory. The pan-European unemployment rate is falling at the same pace as America’s, thanks to accelerating job gains across the region. Pressures appear to be rising: the job vacancy rate is also accelerating, as we speak. Hiring intentions also look stronger. According to the Manpower survey, the net employment outlook is rising in France and Spain, while it is positive and stable in the UK and the low countries. Others are faring much better. In Germany, Italy and Ireland, the Manpower Index is at multi-year highs, and there is no apparent let-up in trend growth.

Employment gains are particularly significant, as they are a lagging indicator of economic activity. When they start to pick up, it is a clear signal that the economy has already been generating decent growth for some time. GDP data suggest that indeed, that is the case. Pan-European growth has been above its long-run benchmark for seven of the last eight quarters – not by much, mind you – but by enough that this is perhaps the best indication that Europe is in general on the way back from the bad years.

The bottom line?

Like America, there are positive signs from some very key European indicators at present. But like America, the average European doesn’t seem to realize it. It’s a miss for those who can’t see it, but an opportunity for those who can.

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