Wealth Management: A recovery in the eurozone could help world economy

Recent  developments on the continent suggest the eurozone is in danger of becoming a help rather than a hindrance for the world economy.

Last week figures showed the 17-nation bloc pulled itself out of recession after six quarters of contraction and economists are starting to suggest this stabilisation may restore the region as a prop, if not a powerhouse, for global markets.

While a boom is not on the cards any time soon, a shift in momentum may be detected on the continent and this, inevitably, could have a knock on effect for trade worldwide.

The eurozone accounts for around a fifth of global GDP so any reasonable growth in the region could be enough to offset any potential slowdown in China. This has ramifications for the eurozone’s trading partners, which is good news for the UK and could help consolidate our own tentative signs of recovery.

Indeed, JP Morgan estimates that the eurozone could grow 1.3% in 2014 (after shrinking 0.5% this year) with imports expanding 3.7% after two years of decline.

Manufacturing in Poland and the Czech Republic rose in July due to increased export orders to elsewhere in Europe. Meanwhile, Chinese exports to the EU rose 2.8% in July, the first gain in five months, and Japanese shipments to the EU increased by 8.6% in June.

However, exports have grown faster than imports in recent years, leaving the euro area’s trade surplus around 3% of GDP in the first quarter, the most since the euro began trading in 1999. For this reason, investors should be mindful this recovery is unlikely to be enough to turn the eurozone into a significant driver of global growth any time soon.

Analysts at Goldman Sachs point out that the eurozone is likely to remain a net exporter for the foreseeable future as the “club med” economies continue to repair their economies. There is no doubt the rest of the world still needs Europe to grow and needs Europe to import more.

Looking at the positives, even if demand stays soft on the continent, the very fact it has escaped the depths of the debt crisis could be enough to rally financial sentiment worldwide.

A Bank of America survey of fund managers last month revealed that only 14% cited Europe as the biggest risk, compared with 59% in July 2012.

There are also signs that the uptick will continue with manufacturing unexpectedly rising in July after two years of contraction, while confidence among executives and consumers improved to a 15-month high. Italian industrial output increased in June by the biggest margin since January and rose in Greece by the most since October, while Spain’s recession eased in the second quarter.

Serious issues still remain in Europe with unemployment at a record 12.1%. Joblessness is more than 25% in Spain and Greece with economists predicting growth of only 1% in the eurozone next year versus 2.7% in the USA. In addition, the banking system remains dysfunctional with lending down at the lowest levels on record in June.

Political instability also remains a threat in Italy, Spain and Greece while Germany goes to the polls in the autumn. Tentative signs of recovery can easily be snuffed out by changes in the political mood.

Just over a year since the ECB vowed to “do whatever it takes” to save the euro, the situation does seem to be improving, but one must remain wary that Europe still has the potential to take a step or two back in the near future. With the economy appearing to stabilise, investors may wish to consider the levels of European exposure in their portfolios with a long-term recovery in mind.


Tuesday, August 27th, 2013 EN

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