A follow-up to my last post. The US growth recovery began in 2010 and has been sustained, albeit at a modest pace. The UK recovery did not really begin until 2013, but growth may be quite rapid in 2014. So will it be the Eurozone’s turn in 2014? Furthermore, just as UK growth this year can be quite strong because we have a lot of catching up to do from the lost years of 2010-12, will Eurozone growth also be rapid as it has two recessions (2012 as well as 2009) to recover from?
The chart below suggests perhaps not. It shows household savings rates in these three areas, and also Spain.
|Household Savings Rates. Sources: OECD Economic Outlook and Eurostat|
Focus on the changes. During the 2008/9 recession we saw increases in savings everywhere, as we might expect after a financial crisis. In the US and UK savings stayed high until 2013. The 2013 recovery in the UK is all about the subsequent decline in the savings ratio. Once again, this is what you might expect after a financial crisis: a prolonged period of high savings as borrowing is gradually reduced and wealth positions restored, followed by a boost to demand as savings rates are normalised.
So can we expect the same dynamic in the Eurozone in 2014 and beyond? The answer is probably not, because the decline in the savings ratio has already happened. In fact it seems to have happened earlier than in the UK or US. There is one obvious explanation for this, again straight out of the Keynesian playbook. Unlike the financial crisis, the 2012 Eurozone recession was a recession caused in large part by fiscal tightening. And as basic macroeconomics tells you, if the public sector decides to save more, the private sector has to save less.
The Eurozone appears to have already had its growth boost from declines in the savings ratio: it helped moderate the size of the 2012 recession. This also means we do not know to what extent consumers’ financial balances in the Eurozone have been restored: savings may have fallen in 2010/11 not because any correction was complete (as we hope is the case in the UK and US by 2013), but simply because incomes fell. So for 2014 and beyond, the impetus for recovery may have to come from elsewhere. The pace of fiscal tightening may ease, but it is still a drag on growth. Growth in the UK and US will help, but this may be offset by a decline in the rate of growth in emerging markets. Is there anything else that could provide the basis for a strong recovery?