FRANKFURT, Germany (AP) — Europe’s economies enjoyed modest growth in the April-June quarter even as the U.S. grew better than expected, highlighting persistent transatlantic growth divergences as Europe’s leading economy, Germany, remains sluggish and consumers are saving rather than buying new homes and cars.
Gross domestic product (total production of goods and services) in the 20 countries that use the euro currency rose 0.3 percent in the second quarter, according to official data released Tuesday by Eurostat, the European Union’s statistics office. Germany, the euro zone’s largest economy, contracted again, with output falling 0.1 percent.
Tuesday’s figure follows a similar increase of 0.3 percent in the January-March period and was the first significant increase after more than a year of stagnation, where it has either been slightly above zero, remained at zero or fallen below zero.
In contrast, the U.S. economy grew 0.7% in the second quarter from the first quarter, for an annualized rate of 2.8%. American consumers are spending freely, and government spending is also contributing to U.S. growth through a widening budget deficit, subsidizing business investment, inflation-busting renewable energy, semiconductor production, and infrastructure spending.
These two trends are reversing in Europe, where consumers are saving at record levels and governments are beginning to restrict spending to reduce budget deficits.
“The US performance is mainly due to strong private consumption and domestic investment,” said Thomas Obst, senior economist at the German Economic Institute in Cologne. “Fiscal policy support was higher in the US than in other advanced economies, with total spending amounting to 25% of GDP.” However, rising interest rates have had a smaller impact on lending and the economy than in Europe, he said.
The sluggish growth in the first half of the year follows five straight quarters of virtually zero growth due to a surge in inflation that sapped consumers’ purchasing power.Energy prices have soared after Russia cut off most natural gas deliveries in 2022 over its invasion of Ukraine, and supplies of parts and raw materials have tightened as the global economy recovers from the pandemic.
Those headwinds have abated, but Europe faces lasting effects as new labor agreements lead to a delayed recovery in real wages and government aid and tax cuts aimed at mitigating the energy crisis are phased out as governments turn to reduce deficits that ballooned during the crisis.
Interest rate hikes by the European Central Bank (ECB) have helped to ease inflation from 10.6% in October 2022 to 2.5% in June, but they have also curbed construction activity and blunted years of house price growth. New car sales rose 4.3% in the first half of this year compared with the same period last year but remain around 18% below pre-pandemic levels.
Another factor is the unusually high level of precautionary savings among European consumers: it reached 15.4% in the first three months of this year, the highest ever recorded outside of pandemic years. Reasons for saving more money could include the chance to earn higher interest rates on savings, feeling poorer due to falling house prices, or worries about the future despite a low unemployment rate of 6.4%.
Jack Allen Reynolds, deputy chief euro zone economist at Capital Economics, said high savings rates and consumer surveys suggested “the intention to make big purchases is extremely low”.
