Euro-area GDP growth outpaces America’s

THE appeal of GDP is that it offers, or seems to, a summary statistic of how well an economy is doing. On that basis, the euro-area economy is in fine fettle; indeed, it is improving at a faster rate than America’s. Figures released on May 3rd show that GDP in the currency zone rose by 0.5% in the first quarter of 2017, an annualised rate of around 2%. That is quite a bit faster than the annualised 0.7% rate reported for America’s GDP.

These figures probably overstate the gap between the two economies. In recent years, first-quarter  estimates of GDP growth in America have later been revised upwards substantially. Still, the euro-zone economy is clearly picking up speed, even as America’s goes through a soft spot. A jump in car sales in March saw Europe as a whole overtake America as the world’s second-largest market (behind China). Euro-zone manufacturing grew at its fastest pace for six years in April, according to the purchasing managers’ index, a closely watched gauge of economic activity.   The corresponding index for America fell.

The good news is not confined to manufacturers. The European Commission’s economic-sentiment index, based on surveys of service industries, manufacturers, builders and consumers in the euro zone, rose to its highest level for a decade in April. The bloc’s extra pep is in large part because its recovery from recession is at a much earlier stage than America’s. There is more pent-up consumer demand to accommodate and more spare capacity in businesses to meet it. There is a lot of catching up to do. The unemployment rate is 9.5% compared with 4.5% in America.

Differences in monetary policy in Europe and America reflect the different stages of recovery. The Federal Reserve has started (slowly) to raise interest rates. In contrast, the European Central Bank (ECB) has kept its foot to the floor. At the conclusion of its monthly monetary-policy meeting on April 27th, the ECB kept its main interest rate at zero and the rate it pays on bank reserves at -0.4%. It also left unaltered the pace at which the ECB is purchasing bonds, €60bn ($66bn) a month until at least the end of the year. Mario Draghi, the ECB’s boss, did not give any hint that policy might be tightened soon. Although he acknowledged that risks of economic faltering had “further diminished”, Mr Draghi insisted that underlying inflation in the euro zone was still unduly low.

He still has much to fret about, including China’s management of its debt mountain and Donald Trump’s protectionist threats. Elections in Europe may throw up an obstacle to growth, if not in France than perhaps in Mr Draghi’s native Italy. And despite an agreement reached this week between the Greek government and its creditors on reforms it must undertake, that saga will continue to haunt the euro zone. But, at the very least, amid these anxieties, the economy is gaining strength.

Source: The Economist.com