PMC Weekly Review - May 15, 2015
Last week, the eurozone announced that it grew 0.4% in the first quarter of 2015, continuing its low but upward pace. Although low numbers like this typically aren’t noteworthy, it was the breadth of this growth that was more interesting. For the first time since early 2010, all four of the largest eurozone economies grew: Germany, France, Italy, and Spain. Leading the charge was Spain, the Eurozone's fourth largest economy, with growth of 0.9%. France notched growth of 0.6%, and both Germany and Italy grew by 0.3%. At this point, it seems the impact of the European Central Bank’s (ECB) quantitative easing program, along with lower oil prices and a weaker euro, are contributing positively to the region’s growth. It’s also worth noting that the Eurozone's growth outpaced that of both the UK and US in the quarter for the first time since the first quarter of 2011.
That said, there is danger in making a trend out of an observation, as the storm clouds haven’t cleared in Europe. Spain continues to struggle with heightened unemployment levels (20% of its working age population are not working) and the difficulty of maintaining growth in an austerity/anti-austerity political tug-of-war. Germany, the keystone of the eurozone economy, didn’t live up to analysts’ expectations of first quarter growth: it grew by just 0.3%. Analysts had predicted 2% annualized growth in the Rhineland, and more than halving the fourth quarter’s 0.7% growth rate doesn’t inspire confidence that it will be achievable.
The weak euro, particularly compared to the dollar, was forecasted to drive the heavily export-dependent economy. However, the demand from US consumers failed to prove as influential as hoped. The stories in Italy and France are similar to one another: both welcomed a notable bump in figures that have been anemic or shrinking in recent quarters. Specific to Italy, 0.3% growth is the best number the peninsula has produced in four years, and exceeded expectations. The French economy, showing more promise in recent years than Italy, still faces some notable challenges. The most important one is overcoming the perceived anti-business/pro-labor laws that have stymied growth in the past. So even though a positive GDP growth number is good news for both Italy and France, the political landscape for implementing structural reforms is likely to be a headwind going forward.
So what does all this mean? The overall growth of the region is certainly positive, and the ECB may view its newly implemented $68B/month asset purchase program as having a positive impact. The program is anticipated to continue through September 2016. Given the shaky ground of these GDP numbers, and the fact that Germany, the stalwart of the eurozone, stumbled in the quarter, it seems that the bond purchase program is in no danger of being reduced or ceasing early. Additionally, Greece, although a much smaller contributor to the European economy, continues to capture headlines, and slipped back into recession in the first quarter, its second successive quarterly contraction. Greece’s potential default continues to be a reality as negotiations with creditors and its membership in the eurozone and currency remain in question. Partner these factors with the recent reversal of oil prices and the weakening euro (two components believed to be contributors to Europe’s positive numbers in the first quarter), and the future is anyone’s best guess. But since most investors are bulls, maybe this strong patch will prove stickier than the US’s “transitory” first quarter soft patch.
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