The euro area economy: Never ending recession?

The outlook for the euro area economy has improved only slightly in recent months. Real DDP has declined continuously during the last one and a half years until the first quarter of this year, and a clear turnaround is not in sight. The June estimate of the Eurogrowth indicator predicts another small decline of 0.1 percent for the current quarter. There is some hope that this will come to an end in the third quarter for which a minor increase of 0.2 percent is predicted. However, given the uncertainty around such estimates and the relatively large standard error, it is certainly too early to say that the recession will come to an end soon. Even at this small rate of increase, unemployment would continue to rise.

Nevertheless, there are some indications that the worst may be over in terms of the downturn. Especially the sentiment has brightened up, especially in industry. However, this improvement is very small, and the level of the indicator is still too low to predict a clear upturn of the economy. While the construction survey continues to signal more or less stagnation only, households remain cautious. This is not surprising given the labor market situation. A slight deterioration is to be expected from the exchange rate since the euro has been rather strong against the US-dollar.

The results of the Eurogrowth indicator are in line with the consensus forecast of a very modest recovery. However, it is still true that hard facts concerning new orders, production and sales are still too weak to support the forecast that the turnaround of the euro area economy is imminent. And it is probably also true that the risks for the outlook are mainly on the downside. The outlook for economic policy remains uncertain which has a negative effect especially on the investment plans of firms.

June 11, 2013
Joachim Scheide
Kiel Institute for the World Economy