The Eurozone has been it hard and in many ways by the Global crisis. Its banks were left in a mess (Blundell-Wignall and Slovik 2010), Greece faced a still haunting debt crisis and rumours of Eurozone break-up were taken seriously (Blejer and Levy-Yeyati 2010). The policy response to these various challenges required, and still requires, a proper identification of the business cycle. Indeed, identifying recessions is crucial to guide policymaking, such as the timing of fiscal expansion and budget cuts (Corsetti 2010 and Reinhart and Rogoff 2010), and especially in uncertain times when news can unchain massive shocks.
In 2002 CEPR established a Business Cycle Dating Committee for the Eurozone to establish the chronology of the Eurozone business cycle, by identifying the recessions and expansions since 1970. This time the Committee determined that a trough in economic activity occurred in the second quarter of 2009. The trough marks the end of the recession that began in the first quarter of 2008. The month of the trough is April 2009, indicated by a clear trough in industrial production, following the peak in January 2008. The recession lasted 5 quarters, or 15 months, and the total decline in output from peak to trough was 5.5%.
This column provides an account of the underlying reasoning, following the official announcement of the CEPR Business Cycle Dating Committee for the Eurozone. All data are taken from the European Central Bank (ECB) or from Eurostat.
How to identify a Eurozone recession?
A recession is a significant decline in the level of economic activity, spread across the economy of the Eurozone, usually visible in two or more consecutive quarters of negative growth in GDP, employment and other measures of aggregate economic activity for the Eurozone as a whole; and reflecting similar developments in most countries. A recession ends when growth resumes in GDP and other key measures of economic activity for the Eurozone as a whole; and when this reflects similar developments in most countries.
Because a recession is a broad contraction of the economy, not confined to one sector, the Committee emphasises economy-wide measures of economic activity. The Committee believes that domestic production and employment are the primary conceptual measures of economic activity, also taking into account industrial production as a monthly measure of private production, sales as a measure of retail activity, investment, and consumption, as well as data on unemployment. Employment and unemployment tend to lag economic activity at the end of recessions: their recovery therefore often follows with some delay. The committee does not forecast, however, whether unemployment rates will eventually return to their pre-recession level, or to some other level.
The quarter of the trough
According to the definition of a recession provided above, the key variables for determining the trough are Eurozone GDP and GDP in the member countries.
Eurozone GDP bottomed out in the second quarter of 2009 (see figure 1), and has grown every quarter since then, in currently available data. Given the initial uncertainty concerning the recovery as well as concerns regarding the impact of the Greek debt crisis, the Committee felt it prudent to wait for the data release on GDP in September 2010 to ascertain that the recession did indeed end in 2009 Q2. Employment has stabilised but has not turned yet (see figure 1), while unemployment has continued to rise, albeit at a slower pace. This is not unusual at the end of recessions, and therefore is not in contradiction to our assessment.
Figure 1. Eurozone GDP and employment (percentage change vs 2009 Q2)
The movement in Eurozone GDP is essentially tracked in the large member countries. Germany and France bottomed in the first rather than the second quarter of 2009, but the GDP difference is mild. Italy bottomed in the second quarter of 2009. The GDP of Spain kept falling until the fourth quarter of 2009, but the further decline was fairly mild. The same picture emerges for most of the smaller countries, with the majority reaching the trough in 2009 Q2 and a few more with a bottom in 2009 Q1. There are a few exceptions and caveats. GDP in Greece has continued to decline. Ireland and Cyprus reached the bottom in 2009 Q4.
The Committee has also examined investment and consumption for the Eurozone. Investment in the form of gross fixed capital formation has kept dropping, until the most recent quarter, while private consumption has grown somewhat less then GDP since 2009 Q2 (figure 2). Decomposing the nominal growth in output from 2009 Q2 until 2010 Q2 shows that private consumption accounted for about half, inventory investment for about a third and government consumption for about a quarter, while the contribution of investment in the form of gross fixed capital formation was negligible and the contribution of trade slightly negative. In short, the recovery of GDP seems to be largely accounted for by private consumption, inventory investment and government consumption.
Figure 2. Eurozone GDP, investment and consumption (percentage change vs 2009 Q2)
The month of the trough
A similar picture is painted by monthly data. In particular, industrial production, as a monthly indicator of economic activity, had a marked trough in April 2009 (Figure 3). Sales show nearly equally deep troughs in March 2009, May 2009 and September 2009, and therefore provides a somewhat erratic picture (figure 4). As raw sales data contain a large seasonal component, one cannot read too much into these somewhat jagged movements of the de-seasonalised data, however.
Figure 3. Eurozone industrial production (percentage change vs 2009 Q2)
Figure 4. Eurozone sales (percentage change vs 2009 Q2)
What about unemployment?
Unemployment keeps rising (figure 5). However, this is not unusual at the end of recessions. Therefore, given the clear trough of industrial production in April 2009, the Committee has decided to declare this month to be the end of the recession.
Figure 5. Eurozone unemployment rate
Blejer, Mario I. and Eduardo Levy-Yeyati (2010), Leaving the euro: What’s in the box?, VoxEU.org, 21 July.
Blundell-Wignall, Adrian and Patrick Slovik (2010), EU banks and sovereign debt exposures, VoxEU.org, 14 September.
Corsetti, G (2010), “Fiscal policy as a policy strategy to exit the global crisis”, Voxeu.org, 7 July.
Reinhart, C and K Rogoff (2010), “Debt and growth revisited”, VoxEU.org, 11 August