Eurozone heating up, but risks loom
Some analysts think region’s growth may have already hit peak
Europe’s economy has revved up this year, and that’s good news for U.S. multinationals who rely heavily on exports and for the high-flying American stock market.
But some economists say growth in the 19-nation euro area has topped out and may be at a crossroads as the European Central Bank moves toward a likely phaseout of its massive stimulus program beginning early next year.
“Europe’s growth has probably peaked,” IHS Markit economist Raj Badiani says.
That doesn’t mean the region’s recovery is petering out, but it likely suggests slower growth over the next few years, economists say. That, in turn, could pose another hurdle for a U.S. stock market some analysts believe is overvalued.
“We do think it’s a little bit of a risk” for stocks, says David Bianco, chief U.S. investment strategist for Deutsche Management.
ECB President Mario Draghi may hint at the central bank’s plans in a speech Friday at the U.S. Federal Reserve’s annual symposium in Jackson Hole, Wyo. Some economists, however, say Draghi will steer clear of any discussion of monetary policy on fears of roiling markets.
“I would be surprised if he says anything of note,” Badiani says.
The eurozone economy grew at an annual rate of 2% the first three months of the year and
2.5% in the second quarter following a 1.7% expansion last year. The International Monetary Fund projects growth of 2.1% in
2017, which would be the fastest pace since 2007.
The U.S. and its corporations are benefiting from the region’s good fortunes as eurozone consumers and businesses buy more American products. U.S. exports surged at a nearly 11% annual rate early in the year before slowing to a roughly 3% gain in the second quarter. Meanwhile, earnings for Standard & Poor’s 500 companies jumped 11% in the April-June period. S&P 500 companies derive about 15% of their profits from Europe, but the share for some sectors, such as technology firms, is much higher, Bianco says. Asset
U.S. companies are gaining both from more robust European demand and a euro that has strengthened vs. the dollar as the eurozone economy improves and the ECB prepares to nudge interest rates higher. A weaker dollar makes U.S. goods less expensive for eurozone customers and allows U.S. firms to realize fatter profits when they convert euros to dollars. The euro has risen about 12% vs. the dollar this year.
Yet the muscular euro is expected to take a toll on the eurozone’s exports by making them pricier for overseas buyers. The region’s exports, which have been booming and driving its economy, fell 3.5% in June, economist Greg Daco of Oxford Economics notes. That month, industrial output for the 19-nation bloc declined 0.6%, giving back half the prior month’s gain.
The region’s economy is “already starting to slow,” Daco says.
Other factors also may restrain growth, including sluggish pay increases and stillstruggling banks. Like the U.S., the euro area was hit by a deep recession from 2007 to 2009, then got socked again from 2011 to 2013 as debt crises in several countries and housing crashes in Spain and Ireland left banks drowning in bad loans and reluctant to lend.
But the ECB lowered its key interest rate into negative territory to encourage borrowing. And it began a massive bond buying stimulus in early 2015 to pump cash into the financial system and lower long-term rates. The campaign finally has encouraged banks to lend more and consumers and businesses to take advantage of cheap loans, Badiani says.
Also, labor market reforms in some countries have made it somewhat easier for companies to lay off workers and avoid collective-bargaining agreements that mandate high wages, spurring hiring and investment.
Meanwhile, populist candidates lost elections in France and the Netherlands this year, easing concerns eurozone countries would follow the U.K. and withdraw from the European Union. “You can’t underestimate the importance of the French election in calming nerves,” Badiani says.
Eurozone unemployment has fallen to an eight-year low of 9.1% from about 12% in 2013. And consumer spending and business investment — bolstered by years of pent-up demand and low oil prices — have notched solid growth. “It’s certainly a recovery that’s looking increasingly sustainable,” Badiani says.