Europe: Revival for Economy and Markets

August 22nd, 2013
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Investing Daily Article of the Week

by Philip Springer, Investing Daily

The euro zone is finally showing evidence of economic improvement. The overall economy of the 17 nations that share the euro currency grew by an annual rate of 1.2 percent in the second quarter compared with a year ago. This breaks a losing streak of six straight quarterly declines.


Follow up:

The numbers there typically are presented on a quarter-to-quarter basis, in contrast to the usual year-over-year comparisons in the US.  Europe's two largest economies, Germany and France, grew by a robust 0.7 percent and 0.5 percent respectively from the first quarter to the second. It was France's biggest quarterly increase in more than two years.

But the economies continued to contract in the next three biggest nations: Italy by 0.2 percent quarter to quarter, Spain by 0.1 percent and the Netherlands by 0.2 percent.

However, Portugal was a standout, jumping 1.1 percent, for the first increase since 2010. The return to growth came after two years of deep recession and austerity policies imposed in return for a bailout of 78 billion euros ($104 billion).

Improvement in Europe's economy has already shown up in the performance of its leading equity markets.  In fact, Europe's bourses have outpaced US stocks over the last three months.

The outperformance has accelerated over the last month. Over that time period, the Standard & Poor's 500 has declined 1 percent. But the bigger members of the euro have done much better, all delivering strong gains.

Here's how the two leading diversified Europe exchange-traded funds (ETFs) have fared over a month:

  • Vanguard FTSE Europe (VGK): 4.7 percent return.
  • iShares Europe (IEV): 4.9 percent return.

Now let's see how much the five leading individual markets have advanced during that time period, from best to good, again using the primary ETFs for those markets:

  • Spain (EWP): 14.6 percent.
  • Italy (EWI): 13.7 percent.
  • France (EWQ): 7.6 percent.
  • Netherlands (EWN): 6.1 percent.
  • Germany (EWG): 4.2 percent.

It's too soon to say that Europe's recession is over, much less that a long-term recovery is underway. And the euro zone's second-quarter growth lagged that of Japan (now the developed-world leader) and the US.

But any sign of growth is good news, particularly considering the region's 12.1 percent unemployment rate, ongoing worries about a wide variety of issues, including a new debt crisis, the dismal health of the Continent's banks and fading but still lingering questions about the euro currency.

Europe's potential revival also enhances the general improvement in growth among so-called "old world" economies. This contrasts with the broad slowdown in the emerging markets, notably the BRICs (Brazil, Russia, India and China).

For example, China currently is expected to grow at about 7.5 percent this year, down sharply from 14.2 percent in 2007 and its slowest advance since 1990. India, which grew at over 9 percent annually for several years before the financial crisis, is now running at a 5 percent rate. Two years ago, the Brazilian economy grew 7.6 percent. For 2013, economists project growth of about 2.3 percent.

Undeniably, the actual growth rates among the developed economies, at annual rates under 3 percent, likely will continue to lag that of the broad remerging-markets category. But the developed economies still account for about 60 percent of the world economy, so any improvement provides a meaningful contribution to overall global growth.

Currently, the International Monetary Fund forecasts that the global economy will expand 3.3 percent this year, compared with 3.2 percent in 2012 and 4 percent in 2011.

Getting back to Europe, it's hard to disagree with the consensus view that the recovery there is too sluggish and likely will remain so for some time to solve the euro zone's multiple problems. Meanwhile, politicians already are taking credit for the modest economic gain that has just occurred.

The big question: Will the small improvement to date boost efforts for more growth or merely lead to complacent claims that the region's financial crisis is receding?

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