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FEATURE
EurozoneConsumption and employment drive growth
Alexander Börsch
2
GROWTH IN THE eurozone is lower than in 2017, but the recovery is robust, driven mainly by strong consumption and employ-
ment growth. These internal drivers have made the recovery fairly resilient against external risks.
Economic situation
Growth in the eurozone stabilized in the second quarter of 2018, following a weak first quarter. The eurozone as a whole grew 0.4 percent. Among the larger eurozone economies, Spain again showed the highest growth dynamics (0.6 percent), Germany grew slightly above the eurozone average (0.5 percent), while France and Italy grew below it (0.2 percent).1
The recovery remains intact and solid, albeit not spectacular. Compared to last year when the euro-zone grew at a record pace of 2.5 percent, this year’s growth dynamics are weaker. This is mainly due to industrial production and exports. Both developed very strongly in 2017, but have been significantly weaker this year. Industrial production decreased slightly in the second quarter, while the net balance of foreign trade contributed negatively to the growth performance—imports grew more strongly than exports.2
Growth, therefore, continues to be driven mainly by private consumption. The external po-litical risks—like the trade conflict between the United States and China, and the corresponding higher uncertainty—likely affect primarily the ex-ternally oriented manufacturing sector. Looking forward, early indicators, such as the purchasing managers’ index (54.5 in September), continue to signal fairly robust growth, even if they have fallen
since the beginning of the year.3 In addition, corpo-rate investments are on an upward trend and are developing solidly.4
European consumers still upbeat
Private consumption has been the key pillar of the eurozone’s recovery for quite a while now. This is welcome news as it supports a continued and self-sustaining recovery and has made the export-oriented eurozone less vulnerable to external turbulence.
In absolute terms, the eurozone’s private con-sumption has grown significantly, by around EUR 400 billion, in the last five years (figure 1). This translates into an increase of 8 percent.
Positive trends in consumption and the labor market have sustained the eco-nomic recovery in the eurozone in the second quarter. Global trade conflicts and regional political uncertainties may be an overhand in the medium term.
Eurozone: Consumption and employment drive growth
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At the same time, many consumers remain pretty upbeat. Much has been made of the fact that consumer confidence fell to the lowest level since mid-2017. However, if we look at longer time frames, the current level of consumer confidence is, in fact,
one of the highest—not only since 2010, but also in decades (figure 2). We have to go back to 2000 to find similar positive values as in 2018.
One potential risk for consumer spending in the near future stems from inflation. While core infla-
FIGURE 1
Private consumption in the eurozone has grown 8 percent since 2013
5,000
5,100
5,200
5,300
5,400
5,500
5,600
5,700
5,800
2010 2011 2012 2013 2014 2015 2016 2017 2018
EUR (billion)
5,366 5,3635,299
5,2705,316
5,410
5,513
5,6065,684
Source: Oxford Economics, Deloitte analysis.
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8%
FIGURE 2
Consumer confidence in the eurozone is at a very high level Consumer confidence index (difference from the long-term average)
-20
-15
-10
-5
0
5
10
15
2011 2012 2013 2014 2015 2016 2017 20182010
Long–term average
Source: European Commission, “Consumer sentiment index,” accessed September 24, 2018.
Deloitte Insights | deloitte.com/insights
Note: The long-term average was shifted to zero for better readability.
Eurozone: Consumption and employment drive growth
4
tion (excluding energy prices) rose to 1.1 percent, overall inflation reached 2.1 percent, the highest in six years. Given that wage increases have not been substantial so far and lag the labor market performance, real income might fall and depress consumer spending.
For the moment, however, the positive consumer sentiment indicates that consumers will very likely continue to drive the recovery. One crucial precon-dition is the development on the labor markets as the positive trend has driven much of the consump-tion increase so far.
Labor market trends
The eurozone’s labor markets have demonstrated a very positive trend in 2018 (figure 3). The unem-ployment rate of 8.4 percent marks a nine-year low. The pace of job creation too remains strong. Over the last five years, the eurozone economy created around 9 million jobs, raising the number of em-ployees from 149 million to 158 million.
A deeper analysis of employment growth reveals that the biggest job growth took place in sectors related to professional, technical, and scientific ser-vices; information and communication; and public services, including health care (figure 4). The em-ployment growth in the first two sectors indicates a further shift toward knowledge-intensive and high value-added technology sectors.
CONCLUSIONOverall, current growth in the eurozone is
mainly driven by a good performance of the labor market, translating to consumption growth. Even so, risks to the economic outlook and the recovery are not hard to find. Global trade conflicts, political cleavages within the European Union, and the uncertainty surrounding the Brexit negotiations all have the potential to increase uncertainty and derail the recovery in the medium term. Neverthe-less, as long as the positive trends in labor markets and consumption continue, the eurozone’s recovery looks fairly resilient.
FIGURE 3
Labor markets in the eurozone remain strong, boosted by low unemployment and solid job creation
Employment Unemployment
Source: Eurostat.
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150 150 150 149 150151
153156 158
10.2% 10.2%11.4% 12.0% 11.6%
10.9%10.0%
9.1% 8.3%
5
7
9
11
13
15
17
19
130
135
140
145
150
155
160
2010 2011 2012 2013 2014 2015 2016 2017 2018
Employment(million)
Unemployment rate (percentage)
Eurozone: Consumption and employment drive growth
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FIGURE 4
Professional, technical, and scientific services as well as information and communication have seen the highest employment growth
Source: Eurostat; Deloitte analysis.
Deloitte Insights | deloitte.com/insights
Agriculture, forestry, and fishing
Manufacturing
Construction
Information and communication
Financial and insurance activities
Real estate activities
93
101
91
114
95
106
119
105
85
90
95
100
105
110
115
120
2010 2011 2012 2013 2014 2015 2016 2017 2018
Professional, scientific, and technical activities; administrative and support service activities
Public administration, defense, education, human health, and social work activities
Arts, entertainment and recreation; other service activities; activities of household and extraterritorial organizations and bodies
Wholesale and retail trade, transport, accommodation, and food service activities
Index (2010=100)
Eurozone: Consumption and employment drive growth
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1. Eurostat, “GDP up by 0.4% in both euro area and EU28,” September 7, 2018.
2. KfW Research, “Gute wirtschaftslage, aber erhöhte risiken,” September 7, 2018.
3. IHS Markit, “Output growth broadly steady in August but expectations weaken,” accessed September 27, 2018.
4. Corporate investments grew 1.2 percent in the second quarter. See Eurostat, “GDP up by 0.4% in both euro area and EU28.”
Endnotes
ALEXANDER BÖRSCH is the chief economist and head of research at Deloitte Germany. Before joining Deloitte, he worked as senior economist in the investment management and management consulting in-dustries. He is the author of numerous publications on topics such as the European economy, economic trends, digital economy, Brexit, and competitiveness of companies, cities, and nations. He holds a PhD from the European University Institute and was a visiting researcher at the London School of Economics, Warwick University, and INSEAD.
About the author
Contacts
Alexander Börsch Deloitte & Touche GmbH Germany +49 (0) 89290368689 [email protected]
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ConsumerVicky EngDeloitte Services LPUnited States+1 203 905 [email protected]
Energy, Resources & IndustrialsRajeev ChopraDeloitte Touche Tohmatsu LimitedUnited Kingdom+44 7775 [email protected]
Financial ServicesBob ContriDeloitte Services LPUnited States+1 917 327 [email protected]
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Eurozone: Consumption and employment drive growth
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