Germany’s Slowdown Weighs on Europe’s Economy as U.S. Surpasses Expectations

Europe’s economy experienced modest growth in the April-June quarter, contrasting with the U.S., which surpassed expectations, underscoring a persistent transatlantic growth divide. Germany, Europe’s largest economy, continued to struggle as cautious consumers opted to save rather than invest in new homes or cars.

Preliminary data on Canada’s economic performance for the second quarter will be released on Wednesday.

According to Eurostat, the European Union’s statistics agency, gross domestic product (GDP), representing the total output of goods and services, increased by 0.3% in the second quarter across the 20 countries that use the euro. However, Germany slipped back into contraction, with output falling by 0.1%.

Tuesday’s figures align with a similar 0.3% growth seen in the January-March quarter, marking the first notable increase after over a year of stagnation, where growth hovered around zero.

In contrast, the U.S. economy expanded by 0.7% from the first to the second quarter, equating to a 2.8% annualised growth rate. U.S. consumers are spending robustly, with additional support from increased budget deficits and subsidies for business investment, such as those provided under the Inflation Reduction Act for renewable energy and for semiconductor production and infrastructure.

In Europe, these trends are reversed, with consumers saving at record levels and governments beginning to tighten spending to reduce budget deficits.

“The outperformance of the U.S. is largely due to strong private consumption and domestic investment,” said Thomas Obst, senior economist at the German Economic Institute in Cologne. “Fiscal policy support was higher in the U.S. than in other advanced economies, overall spending 25% of GDP.” Meanwhile, higher interest rates have had less impact on lending and the economy than in Europe, he said.

The modest growth figure for the first half of this year comes after five consecutive quarters of nearly zero growth, driven by a surge in inflation that eroded consumers’ purchasing power. Energy prices skyrocketed after Russia significantly reduced natural gas supplies in 2022 following its invasion of Ukraine. Simultaneously, the global economy’s recovery from the pandemic strained supplies of parts and raw materials.

Those headwinds have eased, but Europe continues to feel the lingering effects as new labour agreements gradually restore real wages, and government support payments and tax breaks, aimed at alleviating the energy crisis, are phased out. Governments have now shifted their focus to reducing deficits that ballooned during the energy crunch.

Obst, the economist, noted that while Europe avoided mass layoffs during the pandemic by paying employers to keep workers on, those measures “restricted the ability of the eurozone economy to adapt” and redirect resources to new businesses. “It sounds cliché, but a lot of the output gap stems from higher business dynamism in the U.S. than in the eurozone,” he said.