European growth and investment
Patrick Foley Chief Economist, Lloyds Banking Group March 2015
Europe’s two growth problems
1. Secular stagnation
2. Legacy of the crisis
§ Ageing populations
§ Ongoing demand deficiency
§ Weak productivity growth
§ Debt overhang § Banking sector restructuring § Weak investment § High long-term unemployment
1
Secular stagnation Ageing populations a headwind to growth Old-age dependency ratio, % Over 65 as percentage of 15-64 0
10
20
30
40
50
Ireland Belgium UK Denmark Austria EU28 France Spain Netherlands Italy Greece Portugal Germany 2013
2030
Source: Eurostat 2
Secular stagnation Can future productivity growth offset ageing? GDP/worker, % annual growth UK Greece France Germany Italy Portugal Ireland Spain USA Eurozone 0
0.5
1 1995-‐2007
1.5
2
2.5
3
2014-‐2030
Source: Nicholas Crafts, Secular stagnation: US hypochondria, European disease?, VoxEU, 2014, based on data from the Conference Board and projections from the OECD 3
Legacy of the crisis Weak investment makes productivity catch-up harder Investment, Index 2008Q1=100
4
Legacy of the crisis Public sector not investing despite near-zero bond yields General government fixed investment, % of gdp 0 1 2 3 4 5 Belgium Germany Italy
Denmark
§ Pre crisis – German government was investing less than any country except Belgium § Post crisis – Reduced investment in all periphery countries – Not offset by more investment in core
UK Austria Portugal
France Netherlands
– Germany investing a bit more, but less than any country except Spain, Ireland
Spain Greece
Ireland Source: Eurostat
6
2008
2013 5
Legacy of the crisis Business investment depressed Business gross investment, % of gdp 0
5
10
Ireland Greece
Netherlands Germany
20
§ Pre crisis – Low investment in some core countries – “Socially useless” investment in periphery § Post crisis – Reduced business investment in all countries
France Italy Denmark Belgium
– Demand uncertainty
Portugal
– Poor long run growth prospects
Austria
– Debt overhang
Spain Source: Eurostat
15
2008
2012
– Credit access/cost 6
Legacy of the crisis Human capital (dis)investment Unemployment rate, 2014, % Austria 1.2 3.7 Germany
4.9
2.6 3.9
France
4.3
7.4
4.6
6.8
Italy
7.2
Portugal
8.0
– more than total unemployment rate in US, UK
8.5
5.9
Ireland
Greece
6.6
4.8
Belgium
Spain
• 6% of the workforce in the Eurozone have been unemployed for more than 12 months
2.2 2.8 5.0
Denmark 1.7 Netherlands
4.9
10.2
4.5
11.3
5.5 6.1
12.2
• Hysteresis effects on future growth potential
12.7 14.1
– skills deplete
12.3
24.5
17.8
8.7
>12 months
<12 months
– Incentives weaken
26.5 Source: Derived from Eurostat data 7
Three risks
1. Stagnation risk Legacy of the crisis
Secular stagnation
2. Monetary union risk 3. Political risk
8