Is Europe heading the same way as the US?

Growth may be plunging in the US, but in Europe the slowdown has been gradual. Having grown by 2.7% last year, the eurozone is on track to expand by about 1.8% this year, according to a European Commission estimate, amid softer global growth, the strong euro and bursting housing bubbles in the Club Med economies and Ireland.

And this week the Ifo German business confidence index ticked up to just below last spring's highs, while the zone's purchasing managers' index posted a surprise rise in February. But as in the UK and US, inflation is limiting the European Central Bank's room for manoeuvre, with eurozone inflation at a 14-year high of 3.2% and unlikely to come down as fast as expected, warned ECB vice-president Lucas Papademos this week.

What next for the eurozone?

Still, while the eurozone has hitherto proved relatively resilient, it's still far too soon to assume a limited knock-on effect from US weakness, as Capital Economics pointed out. In the fourth quarter German consumption fell unexpectedly sharply, highlighting "a weak spot in Europe's largest economy", as Ralph Atkins said in the FT. This deals a blow to hopes that consumption can offset lower investment and exports this year and thus temper the impact of a US slowdown although on the plus side retailers' confidence improved in the latest Ifo survey. Meanwhile, confidence about export prospects declined, suggesting the impact of the strong euro is being felt. "The German economy is definitely sailing in choppy waters," said Alexander Koch at Unicredit.

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Meanwhile, don't count on the trade decoupling thesis applying to Europe, said Michael Sesit on Bloomberg.com. America accounts for just 12% of EU external exports, but that's not "the full story". Note that sales of US affiliates of German firms totalled $352bn in 2005, four times the value of German exports. Dutch US affiliate sales were 16 times exports. If the US heads south, "so too will the earnings of many European firms".