Europe’s Economic “Recovery”

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By John Richardson

EUROZONE GDP expanded 0.3% in the second quarter of this year and it will probably also have expanded in Q3. As a result, if you view the end of a recession as two consecutive quarters of positive growth, the champagne corks should perhaps be popping.

Europe’s politicians have seized on the first improvement in European indicators for a long time as indicating that their policies are working, wrote Wolfgang Munchau in this article in the Financial Times.

But he adds that:

  • Comparing the first half of 2007 and the first half of 2013, real GDP contracted by an accumulated 1.3% in the eurozone, 5.3% in Spain and 8.4% in Italy.
  • In the same period investment was down by an accumulated 19% in the eurozone – and 38% in Spain and 27%in Italy. Between the first quarter of 2007 and the first quarter of 2013, employment fell by 17% in Spain and 2 % in Italy.
  • The single largest constraint on the resumption of growth in the eurozone is not fiscal policy, which is broadly neutral across the single-currency area, but continued failure to clean up the banks. As a result, growth in loans to the non-financial sector remains very weak.

Is the single-largest contributor to weak growth instead demographics? Charles McPhedran, in this article on newmatilda.com, the Australia-based website for independent journalism, appears to agree with us that Europe’s ageing population is the biggest cause of this economic stagnation.

He points out that:

  • Since the post war baby boom ended, the number of children born in Europe has fallen almost continually. From nearly eight million in the early 1960s, the number of newborns has fallen to just over five million per annum today.
  • Germany, the leading continental power, has been among the first to confront the effects of a greying population. Already, the average age here – at over 42 years – is among the oldest in the world. Only the Japanese and the Italians are older, and both of them have a higher life expectancy than the Germans. Accordingly, a dramatic demographic decline is predicted for the country in the coming decades. The number of Germans is forecast to decline from over 80 million to just under 70 million by 2050.
  • In Spain, the population is already expected to decline in the coming decade, says Madrid daily El País. Spanish fertility began to decline in the 1980s, and, all things being equal, will not increase again until 2030. In a 2012 report, the Spanish National Institute for Statistics sketches an “apocalyptic landscape”. Over 500,000 Spaniards departed the country last year, a figure much higher than the number of immigrant arrivals. Statisticians believe that in the coming decades, Spain will be an ageing society with “an increasing number of illnesses due to ageing … surrounded by islands of unemployed young people”.

This helps to explain why European cracker operating rates have yet to recover to their 2007 level (see the above chart).

But despite these low operating rates, Europe’s cracker operators have enjoyed good profitability since the 2008 global financial crisis because of cost and operating-rate discipline.

What of the future, though? Is there anything more that Europe’s senior petrochemical leaders can do to contribute towards longer-term solutions for Europe’s economic problems?

More tomorrow….

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