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The IMF has revised down its prediction for euro-zone growth to just 1.3 per cent for 2019, and Germany’s to 0.8 per cent – a figure Germany’s own government considers optimistic. Photo: Bloomberg
Opinion
Nicholas Spiro
Nicholas Spiro

China’s economic rebound is helping Europe, but not as much as Italy, France, Germany and Brexit are hurting it

  • China’s first-quarter GDP figures have helped fuel market rallies and some investors see opportunity in unloved European stocks, but home-grown problems will severely limit their upside, and that of the euro-zone economy in general.
Last week, the International Monetary Fund announced that it had slashed its growth forecast for the euro-zone economy, which it now expects will expand by just 1.3 per cent this year, down 0.6 percentage points compared with the IMF’s last full forecast in October 2018. The downgrade was mainly attributable to the even sharper downward revision of growth in Germany, Europe’s largest economy, which is projected to expand by a meagre 0.8 per cent this year, a drop of more than 1 percentage points compared with the IMF’s previous estimate. 
Yet, while the outlook for the euro-zone economy has deteriorated sharply, the slowdown in China has abated. Some of the latest batch of indicators – in particular data on credit growth, exports and house prices – suggest that the series of stimulus measures adopted since last summer are starting to bear fruit, with growth in the first quarter of this year beating analysts’ forecasts. The IMF has even raised its growth estimate for China this year by 0.1 percentage points, one of just two upward revisions for the major developed and developing economies.

In financial markets, the stabilisation of the world’s second-largest economy – which, along with the euro zone, was at the epicentre of a growth scare towards the end of last year – has helped fuel a sharp rally across asset classes as many investors become more sanguine about the outlook for global growth.

The “China factor” is most apparent in this year’s surge in the DAX, Germany’s main equity gauge, which is ultra sensitive to the performance of the global economy. The composition of the index is heavily skewed towards exporters, notably automotive and chemical companies. The DAX has shot up 15 per cent this year, turbocharging a rally in the broader euro zone index, which is up 16.5 per cent.

That Germany’s stock market has shrugged off an industrial recession in the country – manufacturing activity contracted at a faster pace last month to levels not seen since the euro zone debt crisis in 2012, according to survey data from IHS Markit – shows the extent to which sentiment is being driven by signs of a recovery in China and the prospect of a US-China trade deal. On Tuesday, the publication of a closely watched survey of financial analysts in Germany showed that the gauge had moved into positive territory for the first time in over a year as investors’ concerns about the global economy start to recede.
A skipper stands on the bridge overlooking Ford cars on the deck of a barge on the River Rhine in Cologne, Germany, on February 13. Ford earlier this year announced thousands of job cuts across Europe, and warned that measures in the event of a no-deal Brexit would be significantly more dramatic. Photo: Bloomberg

A growing number of investors believe that euro-zone stocks – which remain among the least-favoured assets globally despite this year’s rally – present an attractive buying opportunity as the region’s exporters start to benefit from a China-led rebound, helping instil confidence in the bloc’s economy. In a report published in February, JPMorgan noted that European assets “are where [emerging market] assets were six months ago – cheap, unloved and under-owned relative to most other opportunities globally”.

The question, however, is whether an improvement in the external environment will be enough of a catalyst to turn around the euro-zone’s rapidly slowing economy.

If Europe’s woes were mostly attributable to China’s slowdown and the trade war, there could be grounds for optimism. Yet even if this were true – which I do not believe is the case – it is unlikely that an easing of trade tensions and stronger growth in China would cause the euro-zone’s economy and markets to outperform the US and emerging markets.

An improving global backdrop will not rid Europe of its long-standing problems. Italy, Europe’s third-largest economy, has slipped back into recession for reasons that have little to do with China and stem almost entirely from the failure of its populist government’s policies.

Business confidence has also taken a knock in France, where the “yellow vest” protests continue to disrupt economic activity. What is more, although the UK is not a member of the euro zone, the persistent uncertainty surrounding the terms of Britain’s departure from the European Union has further eroded business confidence across the bloc.

More worryingly, the European Central Bank – which ended its quantitative easing programme last December, despite clear signs that the slowdown in the euro zone was gathering momentum – has been vague about the measures it plans to take to revive growth, partly because of resistance to a meaningful easing of policy from Germany itself. The country that now elicits the most concern about the slowdown in the euro zone is the one that is the most opposed to further monetary and fiscal stimulus – a reflection of the deep flaws in the governance of Europe’s single-currency area.

Lastly, one need only look at the yield on Germany’s benchmark 10-year bond, which is barely in positive territory, to see how sceptical debt markets are about a China-induced recovery in Europe’s largest economy. Even Germany’s own government has just cut its estimate for growth this year to a paltry 0.5 per cent. This makes the IMF’s assumptions look relatively optimistic.

Nicholas Spiro is a partner at Lauressa Advisory

This article appeared in the South China Morning Post print edition as: China rebound unlikely to turn around Europe’s slowdown
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