Goldilocks’ euro-porridge tastes tepid

Nobody has been paying much attention to Europe recently amid all the fuss about inflation returning to America. But last week, it returned to the spotlight – and not in a good way.


Nobody has been paying much attention to Europe recently amid all the fuss about inflation returning to America. Last week, however, it returned to the spotlight and not in a good way. "After a stellar run", the macroeconomic data has started to "sag", says Richard Barley in the Wall Street Journal.

Germany's Ifo business confidence indicator unexpectedly slipped to a five-month low in February. The European Commission's consumer-confidence indicator also undershot expectations by falling in January. The composite purchasing managers' index (PMI) for the eurozone, tracking activity in both services and manufacturing, declined too. The triple whammy of bad news has rattled investors and prompted concern that the recovery may already be faltering.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

A minor blip in the numbers?

Don't panic, says Gavekal Research's Cedric Gemehl. The readings could be a blip; European surveys "have a track record of overreacting to financial volatility that is not justified by macro fundamentals". They slipped in 2016 during the global scare over Chinese growth, but there was scant impact on the underlying economy. Assuming these readings aren't just noise, however, the strong likelihood is that the eurozone rebound is "simply seeing growth hit a plateau" after a sharp recovery.

Surveys across the eurozone have hit multi-year highs in recent months, so these declines are hardly disasters. The German Ifo result still points to a slight uptick in the annual pace of growth from 2.9%, according to Capital Economics. Similarly, the consumer optimism figure is hardly likely to fall off a cliff: employment should keep rising and wage growth is starting to emerge slowly, as the German IG Metall union's generous pay deal highlights. The global economy remains robust, which is crucial as Europe exports more than Britain or America. Capital Economics is still pencilling in GDP growth of 2.5% for the single currency in 2018, matching last year's ten-year high.

Advertisement - Article continues below

Why stocks can keep rising

Growth is no longer accelerating, says Barley. Markets cannot now count on a boost from data exceeding expectations. The Citigroup economic surprise index for the eurozone, a gauge of whether economic data is beating or missing the consensus forecast, has just fallen below zero for the first time since September 2016 after the longest streak in positive territory since 2003. "Expectations have finally caught up with reality."

On the plus side, as Gemehl notes, if the pace of the recovery has ebbed, then economic slack will only be absorbed slowly, inflation will take longer to appear, and monetary policy will only tighten very gradually. While the US market is facing inflationary pressure, Europe is still in a "Goldilocks-style" situation and it's better value, too.



Stock markets

The British equity market is shrinking

British startups are abandoning public stockmarkets and turning to deep-pocketed Silicon Valley venture capitalists for their investment needs.
8 Nov 2019
Stock markets

There are lots of reasons to be bearish – but you should stick with the bulls

There are plenty of reasons to be gloomy about the stockmarkets. But the trend remains up, says Dominic Frisby. And you don’t want to bet against the …
17 Jul 2019

Good news on jobs scares US stockmarkets

June brought the best monthly US jobs growth of the year, but stockmarkets were not best pleased.
11 Jul 2019

Trade-war ceasefire boosts stockmarkets

Stockmarkets sighed with relief after the G20 summit in Japan brought a handshake between Donald Trump and Xi Jinping.
4 Jul 2019

Most Popular


Currency Corner: how is the New Zealand dollar doing against its US counterpart?

The New Zealand dollar has been doing well against the US dollar in recent months, but has started to wobble a little. Is it still a buy? Dominic Fris…
20 Jan 2020
Share tips

India’s small and mid-cap stocks are set for big gains – here are three to buy now

Each week, a professional investor tells us where he’d put his money. This week: David Cornell of the India Capital Growth Fund highlights three favou…
20 Jan 2020
Share tips

Class acts going cheap: buy into Europe’s best bargains

Value investing appears to be making a comeback, while shares on this side of the Atlantic are more appealing on metrics such as price/earnings ratios…
16 Jan 2020
Share tips

Share tips of the week

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages.
17 Jan 2020