Europe(an growth) slipping towards recession?

Friday, 22nd March 2019 15:42 - by Shant

This morning's release of Euro-wide purchasing manager indices was focused on the manufacturing data out of Germany.  As the economic driving force of the Eurozone, its viability in what are undeniably challenging times is a worrying sign for synchronised global growth and reflects the hardship for heavily dependant exporting regions.  The DAX responded with a sharp move lower, and among the big losers on the day were Siemens and ThyssenKrupp, both shedding over 2%.  Automakers were also down with BMW and Volkswagon down almost 1% on the day, though as yet, Daimler is relatively flat on the day.  

This, however, is a clear indication that global demand, above everything else, is what will be the ultimate driver in financial markets over coming years.  As we saw at the FOMC meeting this week, the Federal Reserve wiped off the prospects of a rate hike this year, keeping one on the table for 2020, though I have long suspected that the tightening cycle has peaked in the US and that a period of data monitoring is what will ensue in terms of policy-shaping going forward.  As it stands, the interest rate markets are pricing in a Fed cut some time over late 2019/early 2020, highlighting the effect of the global slowdown currently in play.  

This came off the back of the ECB meeting earlier this month, when the governing council surprised the markets with the timing of its announcement to roll out a fresh series of funding measures in the form of TLTRO 3, but this begs the question; will it be enough to stave off economic slippage in the current environment?  As the ECB admits, the global environment in trade is sluggish, and this has not been helped by protectionist policy from the US.  Fund and asset managers seem to be pinning hopes of a trade deal between the US and China, but I am not sure how this fundamentally addresses the slowdown in China.  As I have spoken of this before, infrastructure spending in China has reached its peak, and the nation is now undergoing a material structural change through innovation.  A large chunk of German exports went to China at the start of this decade, and this has diminished in recent years the recent data series now reflects this.  It now exports more in percentage terms to the US and France.  

So it is also worth noting, that consumer-driven economies have tended to outperform in times like this.  Positive employment data, which is, in fact, healthy in Europe and Japan, naturally has more of an impact on spending and growth in economies such as the US and UK.  Like Japan, the propensity to spend is lower across many parts of Europe, including Germany, so it is hard to see inflation picking up to any significant degree as we have seen with the BoJ failing monetary policy aimed at lifting asset prices.  Core inflation is around 1% in Europe, well shy of its 2% target.  It is even less in Japan, yet they continue with their QE program.  Will the ECB reintroduce asset purchases?

For the reasons above, European stocks are and may continue to underperform those in the US.  In the UK, some clarity on Brexit will no doubt provide a boost to investment, which given the weak Pound, should eventually lead to strong foreign demand, if only on a comparative basis.  With Germany enjoying a healthy trade surplus with the UK, a resolution to the Brexit process would also come as a very welcome relief to Germany, and notable were comments from the Chancellor Angela Merkel this on how important it was to avoid a disruptive exit.  Doesn't she know it! 

The Writer's views are their own, not a representation of London South East's. No advice is inferred or given. If you require financial advice, please seek an Independent Financial Adviser.