It's morning again, in Europe. The pace of the eurozone's sudden improvement across a bundle of economic indicators has shocked analysts since the turn of the year. But there has been a rapid turnaround from gloom to boom in just a few months. What's going on? As recently as Autumn, everyone thought Europe was bogged down in a protracted perma-recession, characterised by deflation, lack of GDP growth and continent-wide political paralysis. Here's what's going on, and why. What's happening? Europe's economies are looking good in a number of ways: Retail sales are surging. This is a consumer-driven recovery. German and Spanish retail sales helped drive the continent's spending up at the fastest pace in 10 years. Consumer confidence is at an eight-year high. After a dip at the end of last year, when the possibility of a third recession was being raised, consumer confidence is now accelerating again. The private sector is reporting the best growth in four years. That's particularly good news for employment. Money is flowing in to European funds at a record pace. This year has seen the biggest inflows into European funds ever recorded already. All in all, it's extremely good news. The chart below shows a "surprise index" for the eurozone. It shows whether European economic data have been more or less positive than analysts projected. This year, they've been overwhelmingly better than pretty much anyone expected: But why? I thought Europe was a basket case. That's not untrue. The eurozone has had an infamously weak recovery, and two recessions, since 2008, all amid the chaos of whether Greece would exit (and take other countries in southern Europe with it). But there are a few main factors that help explain why there's a recovery underway now: The credit cycle has been turning positive for some time now. This went under the radar for a lot of people. Since early 2013, the flows of credit to businesses — loans and other types of investment funding — actually turned positive at the start of this year. That has stopped being a drag on the economy and starting having an upwards impact. The fall in oil prices has helped. Retail spending is climbing considerably, and that is due to oil prices, at least in part. When petrol prices fall, it frees money to spend on other things. The falling euro. The European Central Bank finally decided to do QE, and the programme they embarked on was about twice as large as analysts expected. That's helped to accelerate the drop in the euro, which in turn helps anyone exporting goods made in Europe to other countries. However, it's worth noting that a lot of things began improving before QE came in. There are some good signs for German wages. After decades in which wages have forcibly been held down by employers (with the co-operation of unions), wages are now rising at the fastest pace in 20 years. Wages rising in the economically healthier countries is a particularly good sign for Europe — because countries where unemployment is high will be increasingly competitive on wages. What Europe really needs is a good burst of inflation in the core areas. It's unlikely to get that, but wage growth is the next best thing. What could go wrong? Plenty. Just because the eurozone is enjoying a bit of a cyclical upturn doesn't mean that it's a good idea in the long term. The political and economic tensions in Brussels and Frankfurt may yet ruin any growth spurt. Some countries still aren't really included yet, either — Germany's growth has been surprisingly good and Spain has been seeing a decent, if not spectacular, recovery. Italy and Spain have been slower starters. It's also worth noting that this is a change in direction, not levels — the eurozone recovery currently underway is interesting because it was expected, not because it is tremendously impressive. Unemployment in the currency union is still 11.2%, a full four percentage points above where it was in February 2008. The eurozone's performance since 2008 has made even the UK, which has had its worst economic recovery on record, look impressive. But like the UK, there's a point at which people get too pessimistic in their expectations, and can't see a recovery coming. That recovery looks like it really is here this time for Europe. The major thing still hanging over Europe is deflation — prices are still falling, and economists have been rightfully concerned about what might happen if it becomes embedded, as Japan's deflation has. But money supply is now growing at a solid pace in Europe: Here's Oxford Economics on that trend: "The stronger broad money growth – if it is maintained and even accelerated – implies that sustained deflation in the Eurozone (as opposed to a few months of negative inflation) is highly unlikely."Join the conversation about this story » NOW WATCH: Hugh Hefner's Son Has A Surprising And Inspiring Attitude Toward Women
 |
| READ THE ORIGINAL POST AT www.businessinsider.com |