Data released this week showed that real GDP in the Eurozone declined 0.2 percent (0.8 percent at an annualized rate) in the first quarter (Figure 1). The outturn marked the sixth consecutive quarter in which economic activity declined, bringing the total contraction over that period to 1.5 percent. Moreover, real GDP is now 3.3 percent below its peak in Q1-2008. In contrast, U.S. real GDP now stands more than 3 percent above its Q4-2007 peak.

One of the few bright spots in Q1 was the German economy, which returned to positive growth after its contraction in Q4-2012. However, we use the term “bright spots” very loosely, as German GDP edged up only 0.1 percent (0.4 percent annualized), hardly a robust outturn. Otherwise, there was little to cheer about in the generally dismal news. Among major economies, French GDP fell 0.2 percent, its second consecutive decline, and Italian and Spanish GDP each plunged 0.5 percent, extending the economic nosedives in those countries. The Spanish economy today is more than 6 percent smaller than it was at its peak in Q1-2008 (Figure 2). Real GDP in Italy is an incredible 9 percent smaller today than it was five years ago.



A detailed breakdown of the Eurozone GDP data in Q1 is not yet available, so it is difficult to pinpoint specific areas of weakness. However, some monthly indicators from the first three months of the year offer some clues. First, growth in retail spending remained very weak (Figure 3). Real personal consumption expenditures (PCE), which include consumer purchases of services, dropped at an annualized rate of 1.8 percent in Q4-2012. Given the weakness in retail spending (goods only), it seems likely that real PCE contracted yet again in Q1-2013. Moreover, depressed levels of consumer confidence and the weak labor market—the unemployment rate in the overall euro area has shot up to more than 12 percent (Figure 4)—are also consistent with continued negative growth in consumer spending. In addition, business investment spending, which has dropped in eight of the past nine quarters, probably contracted again in Q1-2013. Indeed, German statistical authorities indicated that investment spending in Germany appears to have declined in Q1. If investment spending fell in Germany, which is the strongest major economy in the Eurozone, strong growth in investment spending in weaker economies does not seem credible.



Unfortunately, there are no “silver bullets” to restore strong economic growth in Europe in the foreseeable future. The ECB may ease monetary policy further, but 25 bps of rate cuts will do little to jumpstart economies that are dead in the water. European policymakers do not appear to be as adamant as they were a year or two ago that government budgets need to be balanced at all costs, but it is extremely unlikely that fiscal policy will turn expansionary in the near term. Economic growth in the rest of the world remains positive, but it is not strong enough to give a significant boost to European export growth. We are hopeful that Eurozone real GDP growth will turn positive in the second half of 2013, but acknowledge that the risks are skewed to the downside.