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We’ve Got Bad News, Europe


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What's going on?

Hate to break it to you, but the eurozone economy is growing at its slowest pace in more than a year, according to an influential survey of businesses. It’s potentially an early warning sign that last year’s much stronger growth is reversing.

What does this mean?

Unfortunately for Europeans, the latest survey data suggests that growth has slowed for the second straight month. It’s worth noting that growth is still relatively strong – notably better than the years leading up to 2017 – but it certainly seems to be paring back. Some of the blame for the negativity is likely due to the euro, which strengthened in 2017 versus the dollar and made eurozone goods more expensive for foreign buyers (unlike imports, exports create an income for European producers and so provide an explicit boost to the economy).

Why should I care?

For markets: There is less impetus for the European Central Bank (ECB) to raise interest rates.

Most investors expect the ECB to stop buying bonds in September, which would end a historically extreme policy aimed at reducing interest rates in the eurozone (more detail on that here). This early data is unlikely to change investors’ minds, but if more data like this comes out, the ECB would be seen as more likely to continue its support. That would mean continued low interest rates for longer than anticipated and a commiserate impact on investments.

The bigger picture: The tide may be turning for the global economy.

2017 was a very good year for the global economy, at least relative to the years since the 2008 financial crisis. Partly as a result, stock prices shot higher including of some global, “old-school” manufacturing giants like Caterpillar, Deere and Airbus. But the recent news from Europe joins a burgeoning chorus of other economies, particularly in Asia, that are pointing towards weaker growth for 2018. It’s too early to draw any firm conclusions, but this is a risk that appears underappreciated by investors at the moment.

Originally posted as part of the Finimize daily email.

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