Investors in continental equities have been casting envious glances across the Atlantic. While Wall Street rushes from record to record, the pan-European FTSEurofirst 300 index last hit an all-time peak two years ago. But in the past few weeks it has bounced back to a 12-month high. "The sclerotic European economy is, at long last, picking up speed," says Patrick Hosking in The Times.
Progress has been very slow since most of the continent returned to growth three years ago, but there is now a bit more "oomph" evident. The PMI gauge of the manufacturing sector has risen to a six-and-a-half-year high. German GDP growth reached 1.9% last year, the fastest in five years. Italian disposable income is increasing at its fastest rate in 15 years. The eurozone's Economic Sentiment Indicator, covering businesses and consumers, is at a near-six-year high. So the hope is that the single currency area can now build on growth of around 1.5% in 2016.
That would help boost earnings, which remain around 40% below their 2007 peak thanks to the long crisis and lacklustre global growth prospects for which look likely to improve if US President-elect Donald Trump gets his stimulus proposals through Congress. The eurozone is far more export-dependent than Britain or America, so earnings would receive another tailwind. But can the growth keep coming? A weak euro, the fall in oil prices and looser monetary policy, which has lowered the cost of money, have all helped boost growth. And the average cost of borrowing for companies declined from 4.33% in 2012 to 1.82% last November, says Claire Jones in the Financial Times. Now, however, the oil price slide is over, so inflation will tick up, nibbling away at "persistently weak wage growth", says Capital Economics.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
The eurozone economy has been able to largely ignore the euro crisis in the past two years, but that won't be so easy in 2017. Spending could suffer before elections due in the Netherlands, France and Germany, even if populists don't win; perennially chaotic Italy could also hold a vote in 2017. Market nervousness will be reflected in higher bond yields, implying dearer long-term borrowing.
France is the one to watch, says the Buttonwood columnist in The Economist. Polls suggest the right-wing populist Marine Le Pen is unlikely to win, but pollsters haven't exactly excelled themselves of late. Her plan to reintroduce the franc would create chaos even if it took years to implement, markets would panic. If her chances of victory rise to 40% or so, "prepare for a turbulent spring".
-
The top stocks in the FTSE 100After a year of strong returns for the UK’s flagship index, which FTSE 100 stocks have posted the best performance in 2024?
-
A junior ISA could turn your child’s pocket money into thousands of poundsPersuading your child to put their pocket money in a junior ISA might be difficult, but the pennies could quickly grow into pounds – and teach them a valuable lesson about money
