The eurozone’s recession is formally over. Good news—but how good for Canada? The European Union is the second-largest destination for our merchandise exports, but that means eight per cent of the stuff we sell abroad every year ends up there. It’s not much compared to the U.S.’s 73 per cent slice of our export market. Europe matters more for the U.S.’s trade balance sheet, where it accounts for about 20 per cent of goods sold abroad. Exports, though, account for only about 10 per cent of U.S. GDP.
Still, the eurozone’s economic resurgence could provide an important lift to the U.S. recovery, and, through that, to Canada as well. Here’s why:
1. The U.S. needs to export more and seems ready to do so. So far, the U.S. has been able to restart its economy largely by reviving consumer demand and housing. While that might have been the only viable strategy in the early stages of the recovery, it doesn’t seem like a sustainable trend in the long term. With median incomes stagnating, American consumers can’t go much further without taking on new debt. The housing market, with a few local exceptions, has plenty of room to grow without wading into bubble territory, but real estate rallies, as we know know well, can’t last forever. What then? Well, exports, for example. One of the root causes of the financial crisis was global imbalances: America’s super-sized current account deficit and China’s equally massive surplus. The only sustainable way forward for the global economy, analysts warned back in 2009, was for the two to recalibrate their economies. The U.S., it seems, is ready to do that. The Obama administration, the Wall Street Journal noted, seems a lot keener on international trade than it did during the first term. Washington has signed a flurry of trade agreements and is pressing ahead with two massive trade negotiations, one with Asia, the other with the EU. And with its low manufacturing costs, tech-industry leadership and, now, natural gas wealth, the U.S. seems primed for an export renaissance. There’s a snag, though: Emerging markets, home to hundreds of millions of potential consumers of made-in-the-U.S.A. products industry, are in a funk.
2. As emerging economies slow down, Europe could pick up some of the slack. That’s where the end of the recession in the eurozone could come in nicely. Europe’s consumers might be able to absorb at least a little bit of America’s exports potential and help tie over Uncle Sam while the Brics (Brazil, Russia, India, China, and South Africa) sort their many issues.
3. Consumers played a big role in helping return the eurozone to growth. One reason to believe that the revival in Europe might aid the U.S. recovery via trade flows lies in the fine print. It was growth in Germany and France in the second quarter of the year that propelled the eurozone above the zero-growth mark, and German and French consumers, in turn, gave their respective economies a considerable lift. That’s especially welcome news in the case of Germany, which has long relied on an outsized trade surplus, while keeping wages and consumption artificially low. The country might be moving away from that model now: Consumption is growing robustly and worker compensation is rising faster than inflation, while unemployment stays at historic lows. German wallets, it appears, might soon have a healthy appetite for foreign goods.
There are, of course, innumerable “ifs” and “buts” in this scenario. Much of the eurozone is still in recession. Outside the eurozone, the U.K. is struggling. Germany, for all the signs of rebalancing, still carries a considerable trade surplus. China’s slowdown might turn into a hard landing. All kinds of things could go wrong. Still, the end of the eurozone recession is a small step in the right direction.