The eurozone's strong economic recovery was one of the unexpected good news stories of 2017. "Economists are worried this year could deliver a much less desirable surprise," says Claire Jones in the Financial Times.
Recent surveys, especially in Germany, which accounts for around 30% of the bloc's output, have disappointed analysts. Germany's ZEW indicator of economic sentiment has slipped to a five-year low. German industrial production slipped sharply in February, and Europe-wide car sales were 5.3% down year-on-year in March. The widely watched PMI composite gauge, which tracks both manufacturing and services, has slipped in the first quarter.
"The bottom line is that the acceleration of the eurozone economy has stopped," as Florian Hense of Berenberg Bank told the FT. However, for now it looks as though growth will settle into a slower, but still robust pace rather than embark on a downturn. This week it emerged that the PMI stayed steady in April. It is some way below January's near 12-year high, says Capital Economics, but it has "stopped the rot". It is strong enough to be consistent with quarterly growth of 0.5%.
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In Germany, the quarterly pace of growth has slowed marginally, but "we remain fairly optimistic" about German growth, not least because the new government is about to loosen fiscal policy. Note, too, that with GDP only up by 10% in the past decade, unemployment still relatively high and investment still depressed, there is plenty of spare capacity that should allow the recovery to continue. Expect growth of around 2.3% this year after last year's 2.5%.
Currency drags on exporters
Europe is much more geared to global growth than the US or Britain thanks to its large export sector, so the prospect of a trade war would undermine investor sentiment. The strengthening euro is also a concern in this regard. It has climbed by 8% on a trade-weighted basis (against a basket of trading partners' currencies) in the past year, and is at a three-year high against the dollar. However, the currency's drag on exporters' earnings and overall corporate profits will be offset by healthy global and domestic growth. During the euro crisis, the weak single currency was not significant enough to give earnings a boost.
Nonetheless, note that the periphery tends to outperform when the euro is strong, as its stockmarkets tend to be less globally orientated, saysJustina Lee on Bloomberg. Roughly 56% of Spain's market value stems from domestic sectors, compared with 15% in France, according to Credit Suisse research. So while Europe's rally looks set to continue, the southern countries may outpace the north in the months ahead.
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Andrew is the editor of MoneyWeek magazine. He grew up in Vienna and studied at the University of St Andrews, where he gained a first-class MA in geography & international relations.
After graduating he began to contribute to the foreign page of The Week and soon afterwards joined MoneyWeek at its inception in October 2000. He helped Merryn Somerset Webb establish it as Britain’s best-selling financial magazine, contributing to every section of the publication and specialising in macroeconomics and stockmarkets, before going part-time.
His freelance projects have included a 2009 relaunch of The Pharma Letter, where he covered corporate news and political developments in the German pharmaceuticals market for two years, and a multiyear stint as deputy editor of the Barclays account at Redwood, a marketing agency.
Andrew has been editing MoneyWeek since 2018, and continues to specialise in investment and news in German-speaking countries owing to his fluent command of the language.
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