Eurozone growth cools as ECB ends QE
Now that the European Central Bank is to stop buying government debt, and growth is slowing, concern over the sustainability of the single currency area is flaring up again.
Where Wall Street goes, global markets usually follow. As US stocks slipped to a one-year low early this week, Japan's Topix index fell to its lowest level in 18 months; the pan-European Stoxx 600 index has hit a two-year low. A speech by Chinese leader Xi Jinping marking 40 years of economic reforms in China was disappointingly light on future reforms. But the underlying problem "is the same thing that has been driving declines for the last few weeks", as JPMorgan Asset Management's David Kelly told the Financial Times: the prospects for the global economy now that the era of easy money is finally ending.
The ECB ends quantitative easing
The spotlight has been on Europe in the past few days. After four years of quantitative easing (QE), the European Central Bank (ECB) has halted its €2.6trn bond-buying programme. ECB president Mario Draghi believes QE has driven economic recovery when fiscal policy and export demand were unsupportive.
What makes investors nervous, however, is that he has ended his money-printing progamme just as eurozone growth is cooling. The (usually overoptimistic) ECB has pencilled in GDP growth of just 1.7% in 2019. Meanwhile, the widely watched composite purchasing managers' index (PMI) slid to a four-year low of 51.3 last month, says Tim Wallace in The Daily Telegraph. (A score of below 50 indicates a contraction in activity.)
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
Now that the ECB is to stop buying government debt, and growth is slowing, concern over the sustainability of the single currency area is flaring up again.
A rule of thumb has it that "investors can safely deploy capital in economies where the working class mostly drink beer", says Louis-Vincent Gave of Gavekal Research, "but should be careful in places where workers mostly drink red wine." The latter applies to both Italy and France, two countries at the centre of the eurozone's current woes. Next year, France's budget deficit could hit 3.4% of GDP, putting it above the 2.4% deficit proposed by Italy, which put it at loggerheads with Brussels. To quell unrest in his country, France's president, Emmanuel Macron, has promised more welfare spending, which could result in an "Italian-type debt spiral".
The good news
With luck, however, Europe can avoid another currency crisis in 2019. It depends more on exports than other major economies, and global growth, while cooling, still looks reasonable. There is better news on the trade front (see below), while "China seems ready, willing and able to reverse its growth slowdown with a steady diet of stimulus," Ethan Harris of Bank of America Merrill Lynch told the FT. A weaker euro, meanwhile, should bolster profits, while there is already plenty of pessimism in the price: eurozone blue-chips stocks cost around 12 times next year's earnings and yield 3.8%. Fidelity European Values (LSE: FEV)and JP Morgan Smaller Companies (LSE: JESC) are both worth a look.
Sign up to Money Morning
Our team, led by award winning editors, is dedicated to delivering you the top news, analysis, and guides to help you manage your money, grow your investments and build wealth.
Marina Gerner is an award-winning journalist and columnist who has written for the Financial Times, the Times Literary Supplement, the Economist, The Guardian and Standpoint magazine in the UK; the New York Observer in the US; and die Bild and Frankfurter Rundschau in Germany.
Marina is also an adjunct professor at the NYU Stern School of Business at their London campus, and has a PhD from the London School of Economics.
Her first book, The Vagina Business, deals with the potential of “femtech” to transform women’s lives, and will be published by Icon Books in September 2024.
Marina is trilingual and lives in London.
-
How to invest in nuclear power
We need nuclear power to go green, says Dominic Frisby. But there is a better option than huge power stations
By Dominic Frisby Published
-
Chase slashes its easy-access savings rate – is it time to switch?
The Chase easy-access savings account has proved popular with savers thanks to its competitive rate and bonus deals. But, as the rate has dropped, has it lost its charm?
By Katie Williams Published