Chart of the week: Real interest divergence weighs on growth

The real interest rate divergence in the Euro Area has recently generated new attention. Real interest rates fell quite substantially in the crisis up to the end of 2011, but have been rising since then (see graph). However, there have been substantial differences across countries, which can be explained by differences in nominal interest rates as well as by diverging inflation rates.

The four countries with the highest real interest rates evidently had the lowest real GDP growth over the crisis years

Economic theory would suggest that persistent divergences in such real rates should have had an effect on economic growth performance, and the chart below suggests that indeed is the case. The four countries with the highest real interest rates (Spain, Italy, Ireland, Portugal) evidently had the lowest real GDP growth over the crisis years. Such a simple correlation obviously should not be interpreted as proof of causality, and other factors certainly have played an important role in explaining the lacklustre performance of the four economies. Yet, the fact that real interest rates have also moved into negative territory in Germany and the UK may  suggest that lower interest rates facilitate greater opportunities for growth.

Special thanks to Pia Hüttl for her contributions.