European Economy: Southern countries displace Germany – 04/03/2024 – Market

Southern Europe’s four biggest economies have grown around 5% more than Germany since 2017, highlighting how the region’s economy is operating at two speeds after recent shocks.

Italy, Spain, Portugal and Greece have together added more than 200 billion euros to gross domestic product — more than the entire Portuguese economy — in price-adjusted terms over the past six years, while Germany’s GDP has expanded by just 85 billion euros. according to an analysis carried out by the consultancy Capital Economics for the Financial Times.

Germany’s economy has barely grown since the start of the coronavirus pandemic in 2020, after a sharp slowdown in its vast manufacturing sector was exacerbated by a rise in energy prices since Russia’s invasion of Ukraine.

In contrast, southern European countries were boosted by a surge in tourism following the lifting of pandemic restrictions, as well as their lower exposure to the manufacturing slowdown and the loss of cheap Russian gas.

Andrew Kenningham, chief Europe economist at Capital Economics, said output in the four biggest southern European countries “is now more than 5% higher” than Germany’s.

But the growth spurt since 2017 has only partially reversed the ground lost since the 2008 financial crisis, after which many economies on the euro zone’s “periphery” suffered banking crises and needed debt bailouts.

“The ‘peripherals’ together were 20% larger [do que a Alemanha] before the global financial crisis,” Kenningham added.

The recent relative outperformance of southern countries appears to have helped the European Central Bank maintain a broad consensus on the timing of potential interest rate cuts, he said, with most policymakers signaling that this would likely begin in June if economic pressures prices continue to fall.

“Unlike much of the last decade, southern economies do not appear to be clearly in need of looser monetary policy than the major economies,” Kenningham said. “The opposite may be true.”

The two-speed economy in the eurozone has also helped reduce the interest rate gap in southern European countries compared to Germany. The spread between 10-year bond yields in Italy and Germany — a widely watched indicator of financial stress — recently fell to its lowest level since 2021.

Southern countries including Italy and Spain, the euro zone’s third and fourth largest economies, are expected to continue outperforming this year as they continue to grow solidly, while Germany and other northern economies such as Austria and the Netherlands remain stagnant.

Kenningham said he expected the quartet to collectively expand 1% more than Germany between the end of this year and 2026. But he and other economists doubt the trend will continue much beyond that point.

A recent study by Dutch bank ING found that Austria, Belgium, France and the Netherlands have lost labor cost competitiveness due to rapid wage growth over the past four years, while this has improved in Italy, Spain, Greece and Ireland as a result of improvements in productivity . Labor competitiveness in Germany remained stable.

Another factor is the EU’s €800 billion recovery fund, whose mix of subsidies and cheap loans in exchange for growth-boosting structural reforms has predominantly benefited southern countries. Italy and Spain are the biggest beneficiaries of the fund.

Rafael Domenech, chief economist at Spanish bank BBVA, said Spain’s growth was driven by high immigration that increased its workforce by 1.1% last year. But he warned: “Given Spain’s low investment per working-age population and [uma esperada queda na] productivity growth, I doubt that this difference in growth can continue in the future.

“Germany’s five main economic research institutes last week cut their growth forecasts for 2024 to 0.1% from 1.3%. But they predict growth will recover to 1.4% next year.

Yannis Stournaras, head of Greece’s central bank, told the FT that much of the southern countries’ recent outperformance is due to “Germany’s business model adjusting to the new realities” of more expensive energy and lower exports to China, but added, “I don’t think it’s permanent.”

Another factor weighing on German growth was a sharp tightening of fiscal policy to reduce the government’s budget deficit to close to 2% last year in order to comply with the return of the country’s restrictive debt brake rule.

In contrast, southern countries have maintained a more favorable fiscal stance, with Italy’s budget deficit rising to 7.2% last year.

Italy plans to rein in spending to comply with recently restored EU fiscal rules, meaning its outperformance is likely to decline.

Kenningham said almost all of Italy’s growth since 2019 had derived from the costly “superbonus” tax incentives that boosted private construction, but the scaling back of the scheme made such expansion “unsustainable”.