THE ECONOMY OF THE EURO AREA: The Sluggish Recovery of the Euro Area is Slowing Down

Monday, December 2, 2019

The euro area recovery, which started after the last trough in the first quarter of 2013, has markedly slowed down since the fourth quarter of 2017. It is by now, 26 quarters into a weak expansion, the slowest of all euro area recoveries to date - and is currently lagging behind the speed of the US recovery. 

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These are the central conclusions of the latest findings from the Euro Area Business Cycle Dating Committee (EABCDC), a collaboration between the Centre for Economic Policy Research (CEPR) and the Euro Area Business Cycle Network (EABCN). The EABCDC states that:

  • The weak economic expansion that started after the 2013Q1 trough (see the October 2015 findings and the August 2017 statement) has slowed down markedly since 2017Q3 (Figure 1).
  • While Gross Domestic Product (GDP) has decelerated, the recovery of employment has, by and large, continued unabated, leading to a stagnation of real labour productivity since 2017Q4.
  • The deceleration is due in large part to a significant decline in investment and net exports in the euro area.
  • The pace of the euro area recovery, which had been commensurate with that of the United States, is now lagging behind. 

Figure 1: Euro Area Gross Domestic Product (2009Q1-2019Q2)

Why the deceleration is significant 

The recovery of the euro area since 2013Q1 was already weaker than all previous expansions of the area but the growth shortfall has further widened since 2017Q3.

The current deceleration, at this stage of the cycle, is unprecedented, save from the last quarters of stalling economic growth that characterized the end of the 1975Q2-1980Q1 expansion (Figure 2). 

Figure 2: GDP Recovery Paths in the Euro Area

Euro Area and US Comparison

The recovery of the euro area was, until 2017Q3, weaker than that of the United States but, controlling for the fact that the current euro area recovery is younger than that of the United States (the US had avoided the double-dip recession), the euro area expansion was more or less in step with that of the United States until 2017Q3. However, the deceleration of euro area economic activity since 2017Q3 means that currently euro area economic activity is both weaker than that of the United States, and markedly weaker controlling for the length of the recovery.

Detailed Findings

Analysis of the contribution of the components of GDP reveals that much of the slowdown of euro area recovery since 2017Q3 can be attributed to the combination of decelerating net exports and private investment relative to earlier stages of the recovery. 

Government consumption and private consumption contributions have been more stable. The contribution of private consumption growth, not very large to begin with, has declined a little but this has been dwarfed by the decline in investment and net exports.

Individual country analysis reveals that the origin of the deceleration of euro area GDP since 2017Q3 can be traced, among the five largest euro area economies, mainly to Germany and Italy, and to a smaller extent to France, the Netherlands and Spain. This deceleration does not manifest itself markedly in employment data, with the speed of employment recovery unabated since the last trough – at par with the euro area as a whole in France, Germany and Italy, and above par in the Netherlands and Spain.  

What is the Euro Area Business Cycle Dating Committee?

The Euro Area Business Cycle Dating Committee (EABCDC), which is composed of five CEPR researchers, establishes the chronology of recessions and expansions of the eleven-original euro-area member countries plus Greece for 1970-1998, and of the entire euro area from 1999 onwards. The EABCDC is a collaboration between the Centre for Economic Policy Research (CEPR) and the Euro Area Business Cycle Network (EABCN).