Preliminary data released by the European Commission last week shows that the Eurozone grew by 0.4% in the first quarter of 2015 as compared to the fourth quarter of 2014. This is the fastest quarterly growth rate in four years and marks the eighth consecutive quarter of expansion. The region is benefiting from low oil prices and improved credit conditions in the wake of the European Central Bank’s (ECB) quantitative easing (QE) program. However, there is a wide discrepancy in performance across the member countries, and some significant risks to the overall outlook remain.
In early 2015, with the ECB’s main monetary policy rate sitting at just above 0%, the central bank finally followed in the footsteps of the Bank of Japan and the U.S. Federal Reserve and started buying up financial assets. It’s still a bit soon to tell from the numbers, but the move appears to be buoying business and consumer confidence; the economic sentiment indicator for the Eurozone is currently at its highest level in nearly four years. We’ll have to wait a bit longer to see if this improved sentiment translates into higher business investments across the region.
Which countries are the strongest right now? Surprisingly, the countries which suffered the most during the European debt crisis are doing quite well, with the notable exception of Greece. Ireland was the superstar in 2014, with real GDP growth of 4.8%. The economies of Spain and Portugal both expanded last year and growth continues to accelerate, while Italy appears to have just emerged from recession. Looking ahead, the outlook is positive. Analysts surveyed by FactSet expect Ireland to grow by 3.5% in 2015, Spain by 2.5%, Portugal by 1.5%, and Italy by 0.5%, (the country’s first annual expansion since 2011).
Nevertheless, problems remain for Greece. After 18 consecutive quarterly contractions, the economy finally seemed to be turning around in 2014 when it expanded in the first three quarters of the year. Late in the year, however, the Greek president’s call for an election rattled financial markets and created a fresh wave of political and economic uncertainty. The parliament’s failure to elect a new president by the end of 2014 forced a national election in late January, and with the anti-austerity Syriza political party poised to win big in the tough economic climate, anxiety about the future of the Greek bailout arrangement continued to build.
In January, Greek voters gave a decisive victory to Alexis Tsipras’s tough-talking left-wing Syriza party. Tsipras, who became prime minister with his party’s victory, had campaigned on a promise to renegotiate the terms of the bailout and to reverse many of the unpopular tax laws enacted as part of the deal with the ECB, European Union, and IMF. The often contentious meetings between the Greek government and its creditors that followed the election have finally given way to more productive discussions in recent weeks, but time is running out for Greece to figure out how to meet its upcoming debt obligations.
The country is not out of the woods just yet, although speculation that Greece will be forced to leave the Euro area (often referred to as Grexit) has abated for now. The economy has shrunk by 25% since 2007 and the unemployment rate sits just below 26%, depressing both consumer and business sentiment. The outlook for the Greek economy depends on what happens in the ongoing debt talks. Until economic growth takes hold, Greece will remain in a downward spiral, which will either drag down the entire Euro area or lead to a Euro without Greece.