EMU in 2024-Q1: All Early Reporters Avoid Q/Q GDP Decline

GDP in the European Monetary Area in the first quarter rose by 1.3% (saar), offsetting a 0.2% quarter-to-quarter decline in the fourth quarter and a 0.2% decline in the third quarter of 2023. All seven of the early reporters in the table show positive GDP growth in the first quarter unlike the fourth quarter when two of them, Germany and Ireland, showed declines in the fourth quarter of 2023. Growth rates decelerated in Belgium and Portugal in the first quarter with each of them posting growth rates that were only slightly slower than what they had logged in the fourth quarter of last year.

Much attention in the new set of European GDP releases, centers on Germany, which posted a 0.9% increase (at an annual rate) in the first quarter after falling at a 2% annual rate in the fourth quarter. Some news services report this as Germany having avoided recession and this is understandable considering the fixation that the financial press has for the ‘rule of thumb’ that claims that two consecutive quarters of GDP declining defines recession. In fact, that does not define a recession. It is only a ‘rule-of-thumb.’ While some call it a ‘technical definition of recession’ it, in fact, is not a ‘rule’ or a ‘definition’ and there is nothing technical about counting all the way from ‘one’ to ‘two.’

Recession or not it looks like trouble... A closer look at the table shows more serious problems for Germany. If we move to the right-hand portion of the table, we present year-over-year growth rates that, instead of measuring growth from adjacent quarters and annualizing it, we're going to, in this part of the table, look at the raw percentage change and growth from the same quarter of one year ago. The result of that percentage change will be an actual annual -not just an annualized - calculation of growth. When viewed in that way, the growth rate in the first quarter of 2024 is -0.2%; in the fourth quarter of 2023 it's -0.2%, in the third quarter it's -0.1%, and in the second quarter of 2023 it is positive but only logging a growth rate of 0.1%. This is a period of weak German GDP; output has declined on balance over the last four quarters for three quarters in a row. And the quarter before that, when German GDP did not decline, it barely managed any increase at all.

Recession or not, here I come? Whether this is a recession or not, it's going to depend on the judgment of economists who look closely at the German economy. It certainly is not going to be declared by a journalist who's going to look at just quarter-to-quarter growth that is simply going to be too narrowly focused to reveal what is going on in the underlying German economy. Performance certainly is disturbing despite the growth rate that's positive in the first quarter of 2024. Typically, when economists try to assess recessions, there are three metrics that are considered: one is how broad the decline in economic activity is, the second involves the depth of the decline that occurs, and the final metric is the length of the period of time over which this disruption Deacon of activity occurs. So, the three measures are: depth, duration, and breadth. Viewed in this way, the decline in German activity is broad because GDP is the broadest measure of economic activity; activity is declining year-over-year for three quarters in a row. That statement takes in both the category of breath and of length. We're talking about declines in GDP over full year periods that are occurring for three consecutive quarters. On the other hand, the intensity of the decline is only -0.2% for two of these annual periods and it's -0.1% for the other one. All these clearly are declines; they're not particularly severe. And since, at this point, Germany's long-term growth rate is not particularly high, the shortfall of these minor negative growth rates may not rise to the level of disruption that will cause the experts on Germany's economy to say that it is a recession. On the other hand, maybe it is.

Whatever you call it Germany’s economy is not doing well. Over this same span of time looking at growth in the European Monetary Area four-quarter growth in the first quarter of 2024 is only 0.4%. In the fourth quarter of last year it was only 0.1% and the third quarter of last year was only 0.1%. So once again while skirting the ‘popular definition’ of recession for these numbers, the European Monetary Union is showing extremely weak growth. On the other hand, the European Monetary Area also shows a decline in growth in the fourth quarter of 2023 and in the third quarter of 2023 which would trip that rule of thumb signal about it being in recession. Yet, its string of year-on-year growth rates is stronger than the string for Germany even though Germany doesn't trip that so-called ‘technical signal.’ This is a good reason not to get to bound up with the precise label that we put on the economy and whether we call it recession or not. Weakness is simply weakness. And is there a huge difference between a severe slowdown and a mild recession?

Ireland also posts a long string of negative growth rates. In the case of Ireland, these are fairly severe with one of them showing year-over-year growth falling 9.1%, which clearly would be a recession signal and certainly is in the context of all the other negative growth rates that Ireland is reporting. Ireland is a clear-cut recession case.

Quarterly data paints a kinder picture of developments in the monetary union as only Portugal and Belgium are decelerating and there are quarter-to-quarter growth rates in the first quarter with all the rest of the early reporting members showing acceleration. In the fourth quarter, only three countries decelerated compared to their third quarter growth rates. The important lesson here is that GDP growth across these countries in the monetary union as well as for the monetary union as a whole are not showing an intensification of the downward pressures that might be lingering in these economies. Instead, after a period of weakness, we're starting to see growth stabilize and accelerate.

The tendency is for acceleration and deceleration in year-over-year data are a little more concerning. The color coding and the table of growth rates occurs from a full precision calculation of the growth rate so growth rates that to the single-digit that appears in the table. The number may seem to be identical with an adjacent number, but may not be when they are taken to the next decimal point and that reflects why some growth rates that appear to be ‘unchanged’ are color-coded as decelerations in the table. In the first quarter, there are decelerations in France, Germany, Italy, and Portugal. There were three year-over-year decelerations in the fourth quarter; those came from the European Monetary Union as a whole, Germany, and Ireland. The third quarter saw the broadest decline across the Monetary Union with decelerations occurring in every country reporting in this table except Belgium. And the second quarter of 2023 saw deceleration occur in four of the reporting countries as well as in the European Monetary Union as a whole.

We also parsed the data in the table into the four largest economies in the EMU versus the other economies. On that basis, looking at the year-over-year data, the four largest economies do not show year-over-year declines in the last four quarters while the rest of the European Monetary Union shows declines in three of the last four quarters.

Compared to the European statistics, U.S. data are somewhat astonishing. U.S. growth year-over-year of 3% in the first quarter of 2024, 3.1% in the fourth quarter of 2023, 2.9% in the third quarter, and 2.4% in the second quarter of 2023. There's nothing like that among these countries. In the European Monetary Union, the closest to the U.S. result comes from Spain.

Growth for these early reporters shows conditions in the European Monetary Union clearly have progressed from what they were. The depth of weakness occurred in the third quarter 2023 when deceleration was still very widespread and in some countries the extent of decline was severe. Minor weakness seems to have emerged from that phase of severe weakness, but weakness clearly is lingering, and it would still be too soon to say that the EMU is out of the woods as far as weak economic conditions are concerned. Of course, the European Central Bank is now in a different phase having gotten control of inflation and it's widely expected to be cutting interest rates around June of this year. However, that still will depend on how inflation develops, and we've already seen the United States make plans for rate cuts and then must take them off the table and go back into a hibernation mode for policy. It's not clear whether the ECB is going to be forced into that same strategy or whether it will continue to proceed with its rate cut option and if inflation reduction is going to remain on path. These are the conditions we'll be looking for in the future.