Europe's economy grew modestly in the second quarter despite better-than-expected growth in the United States, highlighting persistent transatlantic growth disparities. Europe's economic leader, Germany, continued to struggle as consumers saved rather than spending on new homes and cars.
Official data released on Tuesday by Eurostat, the European Union's statistics office, showed gross domestic product (GDP) in the 20 euro zone countries rose 0.3% in the second quarter. Germany contracted again, with output falling 0.1%.
Tuesday's figure follows a similar increase of 0.3 percent in the January-March period and was the first significant increase after more than a year of stagnation, where it has either been slightly above zero, remained at zero or fallen below zero.
In contrast, the U.S. economy grew 0.7% in the second quarter from the first quarter, for an annualized rate of 2.8%. U.S. consumers are spending freely, and a widening budget deficit and subsidies for corporate investments in renewable energy, semiconductor production and infrastructure under the Inflation Control Act are also contributing to U.S. growth.
These two trends are reversing in Europe, where consumers are saving at record levels and governments are beginning to restrict spending to reduce budget deficits.
“The US performance is mainly due to strong private consumption and domestic investment,” said Thomas Obst, senior economist at the German Economic Institute in Cologne. “Fiscal policy support was higher in the US than in other advanced economies, with total spending amounting to 25% of GDP.” However, rising interest rates have had a smaller impact on lending and the economy than in Europe, he said.
The moderate growth in the first half of the year followed five straight quarters of virtually zero growth due to a surge in inflation that sapped consumer purchasing power.Energy prices have soared after Russia all but cut off natural gas deliveries in 2022 over its invasion of Ukraine, and as the global economy recovers from the pandemic, supplies of parts and raw materials have tightened.
Those headwinds have abated, but Europe faces lasting effects as new labor agreements lead to a delayed recovery in real wages and government aid and tax cuts aimed at mitigating the energy crisis are phased out as governments turn to reduce deficits that ballooned during the crisis.
Economist Obst said Europe avoided mass layoffs during the pandemic by paying employers to keep workers on the job, but those measures “limited the euro zone economy's ability to adapt” and shifted resources to new businesses. “It may sound like a cliché, but much of the output gap is due to higher business dynamism in the United States than in the euro zone,” Obst said.
Salomon Fiedler, an economist at Berenberg Bank, said European growth is also being hampered by long-term factors such as higher taxes and burdensome regulation, and that average annual real GDP growth will be at least a percentage point slower than in the U.S. “If the euro area wants to catch up with the U.S. economically, it needs to boost productivity and invest more in productive capital.”
In Germany, politicians and economists say the main problems the country needs to address include an overly complicated permit process that takes years to get for the construction of wind farms, a shortage of skilled workers and slow investment in infrastructure.
Interest rate hikes by the European Central Bank (ECB) have helped to ease inflation from 10.6% in October 2022 to 2.5% in June, but they have also curbed construction activity and blunted years of house price growth. New car sales rose 4.3% in the first half of this year compared with the same period last year but remain around 18% below pre-pandemic levels.
Another factor is the unusually high level of precautionary savings among European consumers, which reached 15.4% in the first three months of this year, the highest ever recorded outside of pandemic years. Reasons for saving more money could include the chance to earn higher interest rates on savings, feeling poorer due to falling house prices, or worries about the future despite a low unemployment rate of 6.4%.
Jack Allen Reynolds, deputy chief euro zone economist at Capital Economics, said high savings rates and consumer surveys suggested “the intention to make big purchases is extremely low”.
