World Economy On A Recovery Path – Part III

Euro-zone

Helped mainly by government initiatives the Euro zone seems to be firmly on growth path. Germany and France in particular are showing promising growth. Factory orders in Germany increased by 2.7% month on month in September as against the forecasted decline of 1%. Industrial production in Germany also increased by 2.7% month on month in September. Overall for the quarter the industrial production has increased by 3.5%. As per estimates German GDP is expected to increase in the range of 0.5% to 1.0%. In the second quarter German GDP posted a growth of 0.3%.  Growing exports has also helped the German economy increasing by 3.8% month on month as per data from German Statistics office.

Unlike Germany French economy did not have such a good run with its industrial production declining by 1.5% month on month as against the forecasted increase of 0.5%. Overall at the growth level things definitely look positive with the economy growing by 2.9% quarter on quarter. In 2009 the French GDP is forecasted to grow by 1.0%.

Overall in the euro zone area retail sales in September was down by 0.7% month on month after declining by 0.1% in August. The week employment situation along with the current deflationary environment and increased tendency of households to save have been responsible for this. Retails sales fell by 3.6% on a yearly basis which is the sixteenth consecutive monthly loss. Further decline in retail sales is foreseen in Euro zone given the end of “cash for clunker” schemes. Hence government spending and inventories are expected to be the drivers of growth in Euro Zone.

The increasing optimism about the euro zone growth has been supported by the gains in the Euro zone Purchasing Managers index which increased for the third consecutive month to 53 from 51.2 in the previous month. Germany in particular had a strong growth with the IFO index increasing from 91.3 to 91.6 which is the highest level since September 2008 but is the smallest increase in this year.

The employment situation however continues to be grim in the Euro zone. Euro Zone unemployment increased marginally from 9.6% to 9.7%. The unemployment rate in Germany was steady at 7.6% for the third month in row. France and Spain however registered an increase with  unemployment increasing in France to 10% and in Spain increasing from 18.8% to 19.3%.Youth unemployment in Euro zone is particularly high at 20.1% in September with Spain having the highest youth unemployment rate of 41.7%. As per data from European commission about 20% of the employees in the Euro zone are part time workers.

The European Central Bank left the interest rate unchanged at 1% which was expected given the current economic climate. However with inflation in its mind the ECB has signalled an exit from its easy monetary policy. In 2009 the Euro zone is forecasted to grow at minus 4% and in 2010 by 0% to 0.5%.

United Kingdom

UK still continues to be deep in recession. According to preliminary estimates real GDP in the third quarter declined by 0.4% quarter on quarter after a decline of 0.6% in the second quarter. Industrial production registered a decline of 2.5% month on month in August indicating that there is lots to achieve before the economy hits the road to recovery. The inflation rate declined from 1.6% in August to 1.1% in September.

Overall economic activity and housing market indicators are showing some signs of revival suggesting that there may be some positive news on the horizon. The Halifax house price index increased by 2.8% in the third quarter wrt second quarter.

Like other central banks the bank of England in its meeting on 5 November decided to maintain the rate on bank reserves at 0.5% continuing with its easy monetary policy. Among the other stimulus it also decided to increase the size of the asset purchase programme by GBP 25 billion to GBP 200 billion.

Other European countries

In most other non euro European countries the economic situation has improved with some economies registering positive growth and the pace of decline reducing in most other countries in the second quarter of 2009. Real GDP increased in Sweden by 0.2% in the second quarter of 2009 vis a vis a decline of 0.9% in the first quarter.  However in its neighbouring country Denmark there was a 2.6% contraction in output quarter on quarter in the second quarter, following the 1.3% decrease in the first quarter. In September both countries registered decline in inflation to 1.4% in Sweden and 0.5% in Denmark.

In other large economies like Hungary and Romania GDP contracted at a slower pace in the second quarter. In Hungary real GDP declined by 2% quarter on quarter in the second quarter and in Romania it contracted by 1.1%. In Czech republic GDP increased by 0.1% and in Poland by 0.5% in the second quarter. However all these economies continue to be plagued by the problem of high unemployment.

Read more: World Economy On A Recovery Path – Part II