European Growth Reaccelerates from the Brink

November 17, 2014Europe/Middle Eastby EW News Desk Team

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The European Union saw an acceleration of economic growth, according to new figures. Seasonally adjusted GDP rose by 0.2% in the Eurozone and by 0.3% in the European Union in the third quarter of 2014, according to Eurostat.

That growth rate is a surprising acceleration from the second quarter, when growth rose by 0.2% in the 28-nation union and by merely 0.1% in the Eurozone. The results come a week after the EU cut its growth forecasts, citing political tensions in Eastern Europe and the Middle East as headwinds to European growth. The European Commission warned that Eurozone inflation would remain below 2% target, and full year growth in the Eurozone would be 0.8%, down from its spring forecast of 1.2%.

Mixed Regional Health

The most distressed economies in the Eurozone are showing signs of improvement, with depression-stricken Greece now in its third quarter of economic growth, which rose to 0.7% in the third quarter. That is up from 0.3% growth in the second quarter and marks the third quarter in a row for positive economic growth for Greece. Similarly, Spain saw 0.5% growth and Portugal grew at a 0.2% rate. However, recessionary conditions in Italy continued with a 0.1% contraction of economic growth, which was still an improvement from the 0.2% fall in the second quarter of this year. Italy’s trailing twelve-month year-over-year economic growth remains negative, with four straight quarters of year-over-year contraction.

Cyprus also saw its fourth quarter of economic contraction as the island nation struggles to recover from the combination of bank bail-ins and exposure to Russian wealth, as the island was a popular place to store funds amongst rich Russians and eastern Europeans. In 2013, the troubled banks forced the Cypriot parliament to approve a levy on bank deposits of 6.7% for all deposits below 100,000 euros and of 9.9% for all deposits above that amount. The levy was later ratified to focus on uninsured deposits, but the nation’s economy has floundered since then, while EU pressure on wealthy Russians has made Cypriot banks substantially less attractive for wealthy foreigners.

EU Deflation Fears Subside

Deflation, the greatest threat to the European economy in recent months, appears a less urgent concern, thanks to a 0.4% inflation rate in October that was higher than the 0.3% price growth in September. Economists had feared that disinflation and sharp negative inflation rates in recent months could yield a liquidity trap throughout the Eurozone.

Only five EU nations are still stuck in a deflationary spiral. Bulgaria, Greece, Spain, Poland, and Hungary saw negative inflation rates in October, but deflation ended for Italy, Slovenia, and Slovakia. Romania saw the highest inflation rate, at 1.8%, followed by Finland at 1.2%.

Despite the improvement in inflation rates, the Eurozone has seen inflation rates remain below 0.5% since the summer, well below 2013 rates. A year ago, Eurozone inflation was 0.7%. Economists believe inflation rates are likely to remain muted thanks to low energy costs, but a lack of liquidity could mean these energy savings will not translate into greater capital expenditure throughout Europe.