PIGs will not fly in Europe
The newest figures for the last quarter of 2021 released by Eurostat on 15th February 2022 present a picture tinted by the impact of the 4th wave on Europe owed to the Omicron variant.
Growth rates of the Gross Domestic Product (GDP) in volume based on seasonally adjusted data in percentage change compared with the previous quarter revealed that the European Union´s GDP increased by 0.4% in Q4 2021 compared with the previous quarter, which is a visible drop from the 2.2% growth in Q3 and 2.1% growth in Q2.
Austria´s GDP decreased by - 2.2% showing the biggest loss in the European Union considering the country’s GDP increase of 3.8% in Q3 and 4.2% in Q2. This is however not surprising considering the harsh lockdown Austria had to face in the last months of 2021.
Second to last in the statistics comes Germany whose GDP fell by 0.7% in the fourth quarter of 2021 on the third quarter of 2021 after adjustment for price, seasonal and calendar variations. After economic performance had increased again in summer despite growing delivery bottlenecks and material shortages, the recovery of the German economy came to a halt at the end of the year due to the fourth Covid-19 wave and another reinforcement of Covid-19 preventive measures marking a big drop compared with the previous quarter with a change of 1.7%.
A general trend can be seen for Q4 of 2021 that the Member States with very few exceptions record a lower GDP growth compared to the previous Quarter and some even suffered a loss. One of the exceptions is Hungary, which increased its GDP by 2.1% in Q4 compared to a growth rate of only 0.9% in Q4. Also, Spain noted a phenomenal growth of 2.0% in the last quarter of 2021.
The rather sobering result of last quarter’s numbers can be widely explained by the structure of supply and demand under COVID-19´s reign.
While spending on services decreased, manufactured goods were increasingly in demand, which initially led to a boosted manufacturing output with the reopening of economies. But with Omicron came renewed lockdowns and the factory recovery was additionally stalled by shortages of intermediate inputs such as microchips. But this is not yet the end of the rat´s tail. With delivery times reaching record highs, which in some instances can be explained by shortages of shipping containers, came soaring prices of core consumer goods. Shortages in fuel completed the picture leading to a widespread debate about inflation and monetary policy.
It seems that the supply constraints kept the Member States from exploiting their full potential. Factory closures and other supply problems have weighed heavily on the manufacturing output and eventually the GDP in the euro area. The manufacturing output in the Euro-Area in the fall of 2021 is said to have been 6% higher without the constraints on supply. Considering the correlation between manufacturing and overall output it appears that without the constraint of supplies the GDP would have been about 2% higher. This change is usually equivalent to one year´s growth for many European economies in times prior to the pandemic.
The impact of supply shock on manufacturing output was especially noted in Germany and the Czech Republic in comparison to the Euro-Area, especially in France, Spain, and Italy. Even though the Czech Republic´s GDP increased by 0.9% after all whereas Germany´s GDP decreased by -0.7%, without such supply obstacles, both countries would have seen a 14 % higher output presumably leading to a higher GDP increase. The larger impact particularly on Germany and the Czech Republic is due to the fact that in these countries manufacturing firms operate at the downstream end of global value chains. They rely on highly differentiated intermediate inputs – such as microchips. With Germany and the Czech Republic having large automotive sectors, they are key examples of industries particularly vulnerable to supply shocks. This also explains why other countries like France were able to make a speedier recovery.
It can also be seen that especially in Germany and the Czech Republic supply shocks explain around 60% of inflation whereas in the Euro-Area shortages are responsible for about half of the increase in manufacturing price inflation.
Worth noting in Europe´s last quarter’s economic performance are the economies of PIGS (Portugal, Italy, Greece and Spain). Portugal´s GDP increased by 1.6%, Italy´s GDP by 0.6% and Spain's GDP by 2.0%. Even though Greece´s economic performance for Q4 2021 is not published yet, the prospects of PIGS are looking shiny as their economies seem to turn into positive strong territories surviving the constraints of the pandemic. If this endures, a change in the nature of the EU will come upon.
In a nutshell, the figures for the last quarter of 2021 can be described by shortages, shock and (not so) missed chances.
Lina Klesper is a Junior Legal
Assistant at PKF Malta