The Week in Review: U.S. GDP Slumps, European Conditions Mixed

The United States is beginning to underperform other developed countries as several economic indicators point to a slowdown.

Earlier this week the United States Census Bureau reported retail sales stagnated in April, despite expectations of a 0.2% rise in spending as more employment encouraged greater spending. Instead, consumers are limiting their discretionary spending in a trend that has established itself over the last year.

The United States is beginning to underperform other developed countries as several economic indicators point to a slowdown.

Earlier this week the United States Census Bureau reported retail sales stagnated in April, despite expectations of a 0.2% rise in spending as more employment encouraged greater spending. Instead, consumers are limiting their discretionary spending in a trend that has established itself over the last year.

That trend has confounded many economists, who confidently proclaimed six months ago that a steep fall in oil prices would leave greater savings at the pump and on heating costs, which in turn would stimulate discretionary spending and create a virtuous cycle that would stimulate broader economic growth. Several public companies, particularly in retail and consumer discretionary sectors, saw their stocks rally by as much as 20% in late 2014 as investors eagerly bet on revenue gains from that growing spending.

Much of those equity price gains have been lost since then, as investors realized that Americans are not choosing to spend that saved income. Instead, they are choosing to save that money or spend it on paying down their debt. This has driven debt delinquencies, foreclosures, and bankruptcies down to 5.7% by the end of March.

Debt servicing, which has grown as a total percentage of the U.S. economy, has become an even larger burden for Americans. According to the Census Bureau, total household debt rose to $11.85 trillion by the end of the first quarter of 2015, with student loans driving that increase. Younger Americans are earning less and facing larger student loans, hindering their ability to spend on discretionary items and, in turn limiting aggregate demand for goods and services.

France Accelerates, Germany Slows

While Americans are facing a higher debt burden, French consumers are seeing some improvement, although jobless has reached a historic high.

The French economy saw a 0.6% rise in GDP in the first quarter of 2015, beating estimates by 50%. Many investment banks said after the announcement that this could be the beginning of an economic recovery for the Eurozone’s second largest economy, although some worry that the high joblessness means that GDP growth will have to more than double before unemployment falls.

Meanwhile, Germany disappointed expectations with a 0.3% rise of GDP in the same period, with exports lagging imports. In recent years, Germany has outperformed the rest of the Eurozone thanks to very competitive exports helping the country crowd out demand for other countries’ goods and services, particularly Mediterranean countries whose euro-denominated exports have risen in price because of the currency union.

English Pessimism

Across the channel, the United Kingdom is seeing lower economic growth as the Bank of England announced this week that it expects 2.5% annual GDP growth in 2015, a lower estimate than previously. The central bank said the 2008 economic crisis was still limiting growth. In addition to concerns about the Eurozone, “legacies of the financial crisis are the persistent headwinds which continue to weigh on the UK economy,” the bank said.

Additionally, the Bank of England said it expects limited productivity growth and a market that requires historically unprecedented levels of interest rates on government bonds, as the bank fights low demand and encourages greater investment in the economy.