FEATURE Eurozone Consumption and employment drive growth Alexander Börsch
Positive trends in consumption and the labor market have sustained the economic recovery in the eurozone in the second quarter. Global trade conflicts and regional political uncertainties may be an overhand in the medium term. GROWTH IN THE eurozone is lower than in 2017, but the recovery is robust, driven mainly by strong consumption and employment growth. These internal drivers have made the recovery fairly resilient against external risks. Economic situation Growth in the eurozone stabilized in the second quarter of 2018, following a weak first quarter. The eurozone as a whole grew 0.4 percent. Among the larger eurozone economies, Spain again showed the highest growth dynamics (0.6 percent), Germany grew slightly above the eurozone average (0.5 percent), while France and Italy grew below it (0.2 percent). 1 The recovery remains intact and solid, albeit not spectacular. Compared to last year when the eurozone grew at a record pace of 2.5 percent, this year s growth dynamics are weaker. This is mainly due to industrial production and exports. Both developed very strongly in 2017, but have been significantly weaker this year. Industrial production decreased slightly in the second quarter, while the net balance of foreign trade contributed negatively to the growth performance imports grew more strongly than exports. 2 Growth, therefore, continues to be driven mainly by private consumption. The external political risks like the trade conflict between the United States and China, and the corresponding higher uncertainty likely affect primarily the externally oriented manufacturing sector. Looking forward, early indicators, such as the purchasing managers index (54.5 in September), continue to signal fairly robust growth, even if they have fallen since the beginning of the year. 3 In addition, corporate investments are on an upward trend and are developing solidly. 4 European consumers still upbeat Private consumption has been the key pillar of the eurozone s recovery for quite a while now. This is welcome news as it supports a continued and self-sustaining recovery and has made the exportoriented eurozone less vulnerable to external turbulence. In absolute terms, the eurozone s private consumption has grown significantly, by around EUR 400 billion, in the last five years (figure 1). This translates into an increase of 8 percent. 2
FIGURE 1 Private consumption in the eurozone has grown 8 percent since 2013 EUR (billion) 8% 5,800 5,606 5,684 5,700 5,513 5,600 5,410 5,500 5,400 5,366 5,363 5,299 5,270 5,316 5,300 5,200 5,100 5,000 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: Oxford Economics, Deloitte analysis. At the same time, many consumers remain pretty upbeat. Much has been made of the fact that consumer confidence fell to the lowest level since mid-2017. However, if we look at longer time frames, the current level of consumer confidence is, in fact, one of the highest not only since 2010, but also in decades (figure 2). We have to go back to 2000 to find similar positive values as in 2018. One potential risk for consumer spending in the near future stems from inflation. While core infla- FIGURE 2 Consumer confidence in the eurozone is at a very high level Consumer confidence index (difference from the long-term average) 15 10 5 0-5 Long term average -10-15 -20 2010 2011 2012 2013 2014 2015 2016 2017 2018 Note: The long-term average was shifted to zero for better readability. Source: European Commission, Consumer sentiment index, accessed September 24, 2018. 3
tion (excluding energy prices) rose to 1.1 percent, overall inflation reached 2.1 percent, the highest in six years. Given that wage increases have not been substantial so far and lag the labor market performance, real income might fall and depress consumer spending. For the moment, however, the positive consumer sentiment indicates that consumers will very likely continue to drive the recovery. One crucial precondition is the development on the labor markets as the positive trend has driven much of the consumption increase so far. Labor market trends The eurozone s labor markets have demonstrated a very positive trend in 2018 (figure 3). The unemployment rate of 8.4 percent marks a nine-year low. The pace of job creation too remains strong. Over the last five years, the eurozone economy created around 9 million jobs, raising the number of employees from 149 million to 158 million. A deeper analysis of employment growth reveals that the biggest job growth took place in sectors related to professional, technical, and scientific services; information and communication; and public services, including health care (figure 4). The employment growth in the first two sectors indicates a further shift toward knowledge-intensive and high value-added technology sectors. CONCLUSION Overall, current growth in the eurozone is mainly driven by a good performance of the labor market, translating to consumption growth. Even so, risks to the economic outlook and the recovery are not hard to find. Global trade conflicts, political cleavages within the European Union, and the uncertainty surrounding the Brexit negotiations all have the potential to increase uncertainty and derail the recovery in the medium term. Nevertheless, as long as the positive trends in labor markets and consumption continue, the eurozone s recovery looks fairly resilient. FIGURE 3 Labor markets in the eurozone remain strong, boosted by low unemployment and solid job creation Employment Unemployment Employment (million) Unemployment rate (percentage) 160 155 150 150 150 150 149 150 151 153 156 158 19 17 15 145 140 10.2% 10.2% 11.4% 12.0% 11.6% 10.9% 10.0% 9.1% 8.3% 13 11 9 135 7 130 2010 2011 2012 2013 2014 2015 2016 2017 2018 5 Source: Eurostat. 4
FIGURE 4 Professional, technical, and scientific services as well as information and communication have seen the highest employment growth Professional, scientific, and technical activities; administrative and support service activities Information and communication Public administration, defense, education, human health, and social work activities Real estate activities Wholesale and retail trade, transport, accommodation, and food service activities Index (2010=100) 120 Arts, entertainment and recreation; other service activities; activities of household and extraterritorial organizations and bodies Manufacturing Financial and insurance activities Agriculture, forestry, and fishing Construction 119 115 114 110 105 106 105 100 101 95 90 95 93 91 85 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: Eurostat; Deloitte analysis. 5
Endnotes 1. Eurostat, GDP up by 0.4% in both euro area and EU28, September 7, 2018. 2. KfW Research, Gute wirtschaftslage, aber erhöhte risiken, September 7, 2018. 3. IHS Markit, Output growth broadly steady in August but expectations weaken, accessed September 27, 2018. 4. Corporate investments grew 1.2 percent in the second quarter. See Eurostat, GDP up by 0.4% in both euro area and EU28. About the author ALEXANDER BÖRSCH is the chief economist and head of research at Deloitte Germany. Before joining Deloitte, he worked as senior economist in the investment management and management consulting industries. He is the author of numerous publications on topics such as the European economy, economic trends, digital economy, Brexit, and competitiveness of companies, cities, and nations. He holds a PhD from the European University Institute and was a visiting researcher at the London School of Economics, Warwick University, and INSEAD. Contacts Alexander Börsch Deloitte & Touche GmbH Germany +49 (0) 89290368689 aboersch@deloitte.de Global industry leaders Consumer Vicky Eng Deloitte Services LP United States +1 203 905 2621 veng@deloitte.com Energy, Resources & Industrials Rajeev Chopra Deloitte Touche Tohmatsu Limited United Kingdom +44 7775 785350 rchopra@deloitte.co.uk Financial Services Bob Contri Deloitte Services LP United States +1 917 327 0828 bcontri@deloitte.com 6
Life Sciences & Health Care Greg Reh Deloitte Consulting LLP United States +1 215 680 8913 grreh@deloitte.com Government & Public Services Mike Turley Deloitte Touche Tohmatsu Limited United Kingdom +44 7711 137213 mturley@deloitte.co.uk US industry leaders Financial Services Kenny Smith Deloitte Consulting LLP +1 415 783 6148 kesmith@deloitte.com Consumer Seema Pajula Deloitte & Touche LLP +1 312 486 1662 spajula@deloitte.com Telecommunications, Media & Technology Paul Sallomi Deloitte Tax LLP United States +1 408 704 4100 psallomi@deloitte.com Life Sciences & Health Care Bill Copeland Deloitte Consulting LLP +1 215 446 3440 bcopeland@deloitte.com 7
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