Europe’s Economy Rekindles Growth That Still Lacks Confidence
Europe’s best round of good economic news of the year so far gave its prospects an unexpected sheen after months of being singled out as the global laggard.
A week that began overshadowed with data showing the lowest economic confidence since 2016 then brightened markedly, with a doubling of the pace of growth in the first quarter. That flurry was capped on Friday with a faster-than-estimated pickup in inflation too. Benchmark bund yields are now heading for the biggest weekly increase in a month.
The emerging picture of improved health was matched with a bout of buoyant financial results, with stronger-than-expected sales touted by consumer-goods companies from brewer Carlsberg A/S to appliance maker Electrolux AB to luxury giant LVMH.
“I never really believed winter was coming for Europe,” said Hetal Mehta, an economist at Legal & General Investment Management in London and a former U.K. Treasury official. “There is more resilience than I think the market had been counting on in terms of European growth.”
The turnaround has been rapid. Little more than three weeks ago, European Central Bank officials were struggling to put a brave face on a slowdown that had frustrated their attempts to wean the economy off stimulus. The International Monetary Fund piled in too, slashing its outlook for the region and identifying weaknesses in each of its major countries.
The key surprise since then has been on economic growth, which exceeded estimates. The region’s 0.4 percent increase in gross domestic product in the first quarter was powered by Spain’s fastest expansion in more than a year and an end to the slump Italy had wallowed in during the second half of 2018. Tax cuts in France provided a fillip to consumers there.
Businesses have added to the narrative. More than 60 percent of European companies measured by market capitalization have now reported results for the quarter, with sales growth coming in better than anticipated, according to Bloomberg Intelligence. About half of the firms beat expectations, with a weighted average increase in sales at 5.8 percent.
Even greater comfort for policy makers may come from a pickup in inflation. It reached 1.7 percent in April, with an underlying measure stripping out volatile components such as energy jumping the most in almost a year -- though the figures may prove fleeting because of distortions from an annual spree on package holidays linked to the timing of Easter.
Other economic data have yet to be convincing, including indexes of purchasing managers out this week. They showed improvements in April, particularly in Italy and France, but still indicated an overall contraction in manufacturing and came with a health warning from IHS Markit, which compiles them, that it’s “too early to call a turning point.”
Companies aren’t particularly optimistic either. Preceding this week’s economic confidence number was Germany’s Ifo sentiment indicator on April 24, which dropped, while a corresponding number for French manufacturers slumped to the lowest in almost four years.
Nor do the stronger corporate results necessarily reflect an improved economy. Sporting-goods maker Adidas AG, for example, reported a decline in European sales, but still beat overall expectations because of China.
The European Commission’s publication of its quarterly economic forecasts on Tuesday may provide insight on how sustainable officials reckon the recovery is.
The most pressing questions for policy makers are on the health of Germany, whose data formed part of the euro-area GDP report but haven’t yet been published fully.
Europe’s biggest economy has struggled to shake off a bout of industrial weakness centered on its car industry. Bundesbank President Jens Weidmann said on Friday that the growth dip there is lasting longer than expected. Aside from consumer spending, there’s “no comprehensive improvement.”
“It’s been almost a perfect story of bad news for Germany in particular,” said Mehta of Legal & General. “But I think that some of those risks are dissipating.”
For Ricardo Garcia, chief euro-zone economist Europe at UBS Global Wealth Management, the determinant of whether Europe’s pickup is for real will come later this month, with a U.S. decision looming on the imposition of car tariffs.
“That would be an important blow to the euro-area economy,” he said. “But our base case is that we will have a conclusion of U.S.-China talks, U.S.-EU talks can escalate a bit but won’t get out of hand, and no car tariffs. Then these green shoots can really blossom.”
©2019 Bloomberg L.P.