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End of Eurozone Recession Doesn’t Signal End of Economic Woes

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News that the eurozone experienced its first positive quarter of growth since 2011 could signal the European economy is improving, but it still has a long way to go. The end of the longest recession in the bloc’s history doesn’t come with a parade of positive statistics. In fact, the opposite is still true, and the recovery is being described as fragile by Olli Rehn, economic and monetary affairs commissioner for the European Union.

“This slightly more positive data is welcome—but there is no room for any complacency whatsoever.  I hope there will be no premature, self-congratulatory statements suggesting ‘the crisis is over,’” Rehn wrote in a recent blog. He also warned against taking recovery for granted, saying that the region would have to “avoid new political crises and detrimental market turbulence” to continue its progress.

Although Eurostat, the statistics office of the European Union, reported a collective boost of 0.3% in the 17-member currency group, the largest margin of growth came, surprisingly, from Portugal, where GDP increased by 1.1% in Q2. After that came Germany, which clocked in with growth of 0.7%, and after that France, at 0.5%, both faster than expected. Some of the upswing is due to an improvement in the weather that kept shoppers home earlier in the year, according to Chris Williamson, chief economist at Markit Economics.

Another factor is “…volatile industrial production[, which] was driven by a surprisingly strong jump in production of durable goods, led in turn by a 15.7% surge in car production.” Williamson said in research.  That is “the largest ever increase seen since data were first available in 1991. This increase not only looks unsustainable but is also at odds with the PMI data, which tend to give a better picture of the underlying health of the manufacturing sector as a whole.”

Asked what might have been responsible for such a massive surge in auto sales, Williamson said, “There’s a suggestion that they’re ramping up production in the prospect of economic revival in the EU market, and sales have also done well in China and AsiaPac. However, the global environment hardly seems conducive to a production increase of this magnitude, which raises the prospect of production sliding in the third quarter as firms adjust inventories down.”

In fact, while German auto sales were up in both Q1 and Q2, exports fell in July, as indeed they have been falling all year, according to the German Association of the Automotive Industry (VDA)—that despite the fact that in the U.S., German auto manufacturers are close to setting a new sales record. Mercedes-Benz has seen rising demand for compact models and for SUVs, and worked extra shifts both at home and in the U.S. to meet demand. Volkswagen has seen sales increase in the Asia-Pacific region, but watched them fall in Europe.

France’s PMI and GDP numbers, as Williamson cautioned, do not bear out the growth the country has experienced, and INSEE, the French government’s statistics body, has credited the economy’s 0.5% gain to rising domestic demand and an upturn in inventories, neither of which might last through Q3. In addition, INSEE reports that consumer confidence is still hovering near its all-time low—and unless demand picks up further, inventories will be cut.

While a certain amount of the growth reflected in Q2’s numbers is unsustainable, Williamson said that “there’s little doubt that the region is slowly mending. While the PMI data remained weak in the second quarter, the composite PMI hit a near two-year high in July, moving into positive territory for the first time since January 2012 as the German recovery gained momentum and downturns eased in France, Italy and Spain.”

That said, all is not rosy. Without greater increases in productivity, the employment situation will not improve, and without employment there’s a limit to how far an economic recovery can proceed. Portugal, Spain, and Greece still have unemployment numbers in the double digits—Portugal is at 17.4% and Spain, at a whopping 26%, is hardly a picture of recovery. Together with Italy and the Netherlands, Spain is still in recession despite the broader improvement of the eurozone. Greece is technically in a depression, not a recession, even if it has eased slightly. Its unemployment level is 27.6%. And Cyprus saw its economy shrink by 1.4% in Q2 after its bailout in March, with creditors and analysts predicting a total contraction of 13% or more by the end of next year.

With such high unemployment at home, many are looking abroad for jobs, and that’s led to a population downturn of around 2% in Portugal, Spain, and Ireland as well between 2010 and the beginning of 2013. Lower population means lower tax revenues, which means longer recovery times. And of course the debt crisis continues, with austerity measures in full force in several member countries, even though the focus is beginning to shift from strict belt-tightening to stimulus, so that growth is possible and jobs can be created.

There is one more ray of light in an otherwise fairly gloomy situation: the EU also exited its own recession, racking up some modest growth in Q2. For the first quarter since a narrow window in 2011, that puts all four major drivers of the world economy—Europe, China, the U.S. and Japan—in a growth position at once.

Still, analysts and economists in general don’t expect to see a return to stable, healthy growth till 2015.