Germany stays the economic problem child of the Eurozone and is holding Europe back, while the USA continues to dominate

Gross domestic product, i.e. the overall production of products and services, rose by 0.3 percent within the second quarter within the 20 eurozone countries, based on official figures released on Tuesday by European Union Statistics agency Eurostat. Germany slipped back into recession and recorded a decline in production of 0.1 percent.

Tuesday’s figures follow an analogous trend of 0.3 percent in the primary quarter (January-March) and represent the primary significant growth after greater than a yr of stagnation just above, at or below zero.

In contrast, the US economy grew by 0.7% within the second quarter from the primary quarter, or 2.8% on an annual basis. US consumers are spending freely, and support from higher budget deficits and subsidies for business investments, for instance in renewable energy under the Inflation Reduction Act and in semiconductor production and infrastructure, are also contributing to US growth.

In Europe, these two trends are reversed: consumers are saving at record levels and governments have begun to chop spending to scale back budget deficits.

“The US outperformance is largely due to strong private consumption and domestic investment,” said Thomas Obst, senior economist on the German Economic Institute in Cologne. “Fiscal policy support was higher in the US than in other industrialized countries. Overall, 25 percent of GDP was spent there.” At the identical time, higher rates of interest have had less impact on lending and the economy than in Europe, he said.

The mediocre growth rate in the primary half of this yr follows five consecutive quarters of virtually zero growth brought on by a surge in inflation that robbed consumers of buying power. Energy prices rose sharply after Russia cut most natural gas supplies in 2022 due to its invasion of Ukraine and because the global economy recovered from the pandemic, straining supplies of parts and raw materials.

These headwinds have abated, but Europe is facing repercussions as latest collective bargaining agreements slow to revive real wages and government support and tax breaks designed to mitigate the energy crisis expire. Governments have now turned their attention to reducing budget deficits that grew sharply throughout the energy crisis.

Obst, the economist, noted that while Europe was capable of avoid mass layoffs throughout the pandemic by paying employers to maintain their employees, these measures had limited “the adaptability of the eurozone economy” and the shifting of resources to latest businesses. “It sounds trite, but much of the output gap is due to the higher corporate dynamism in the US compared to the eurozone,” he said.

Europe’s growth will even be held back by longer-term aspects equivalent to higher taxes and burdensome regulation, which is able to result in average annual real GDP growth of a minimum of one percentage point below that of the US, said economist Salomon Fiedler of Berenberg Bank. “If the eurozone wants to catch up with the US economically, it must increase its productivity and increase investment in productive capital.”

Politicians and economists imagine that too many complicated approval procedures are vital in Germany. It can take years to get the green light to construct latest wind turbines. There can be an absence of qualified employees and investments in infrastructure are too slow, they are saying.

Higher rates of interest from the European Central Bank have helped bring inflation right down to 2.5% in June from 10.6% in October 2022 – but have also slowed construction activity and worn out years of rising property prices. New automobile sales rose 4.3% in the primary half of the yr from the identical period last yr, but are still around 18% below pre-pandemic levels.

Another factor is the unusually high level of precautionary savings amongst European consumers, which reached 15.4% in the primary three months of the yr – a record high excluding the pandemic years. Reasons for putting extra money aside could include the possibility to earn higher interest by saving, the sensation of becoming poorer as a result of lower house prices, and fears concerning the future, despite the low unemployment rate of 6.4%.

The high savings rate and consumer surveys suggest that “the intention to make major purchases is extremely low,” said Jack Allen-Reynolds, deputy chief eurozone economist at Capital Economics.

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