Eurozone growth cools as ECB ends QE

published 20 December 2018

927_MW_P06_Markets — Beware putting your capital in "places where workers mostly drink red wine"

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.)

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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.

Marina has a PhD in globalisation and the media from the London School of Economics, where she worked as a teaching assistant on the MSc Global Media. In 2014 she was invited to be a visiting scholar at Columbia University's sociology department in New York.

She has written for the Economists’ Intelligent Life magazine, the Financial Times, the Times Literary Supplement, and Standpoint magazine in the UK; the New York Observer in the US; and die Bild and Frankfurter Rundschau in Germany. She is trilingual and lives in London. She writes features and is the markets editor at MoneyWeek..