Thursday, August 18, 2011

Another recession coming up in Europe?

There has been a lot of talk about another possible recession that the world could face. Focus on debt and spending isn't helping since government spending also contributes to economic growth. Following chart presents real economic growth (adjusted with inflation) on a quarterly basis (compared with previous quarter) in the biggest economies in Europe (also for comparison purposes EU27 and eurozone countries in average)

As can be seen from the chart the sudden slowdown occured in the second quarter of current year in all countries at the same time which is remarkable. It can also be seen that sudden slowdown occured again in the final quarter of 2010. The effects of the previous slowdown was thought to be related with extreme weather conditions in northern Europe. This shows that small things (or extraordinary) can have a big effect on economic growth - considering that it is already fragile due to the recent (and still ongoing) financial crisis.

The following chart presents real economic growth on an annual basis (GDP value of current quarter vs GDP value of the same quarter last year - this methodology is not used by major statistics departments which calculate annual growth by multiplying current quarter growth by 4).

From this chart it can be seen that growth indeed has slowed considerably but there is no reason for panic. Previous recession was followed by a quick recovery and the growth has slowed. Whether we will go into negative territory we will find out in October-November.

Couple of more things have to be taken into account. Second quarter numbers obviously include the effects of Japanese nuclear disaster in March and since the whole supply line of major industries was disrupted some of the growth might have just gone there. Also European Central Bank has risen interest rates already twice this year which definitely has a negative effect as well. Cutting of budget deficits isn't helping.

We might see a bounce in economic numbers if some of the weak growth was caused indeed by the Japanese disaster. We might also see ECB lowering rates if weak growth continues and in addition to that some additional measures by the Bank of England (monetary stimulus). All in all I am pretty confident that we will not see a bad recession coming just now.

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