If your investment adviser suggests you look into Europe, don’t fire him. The beleaguered continent is finally starting to look like a decent bet.
In the United States, there have been on-and-off worries about a double-dip recession following the financial meltdown of 2008. But it never happened.
Europe, however, has been mired in a double-dip recession for more than a year. The economy first tanked in 2008, just as it did in the United States. The European economy recovered for a while, but severe debt problems in Greece and Spain plus underperforming economies in Italy, France and elsewhere pushed Europe back into recession in 2012.
That second downturn finally seems to be ending. New figures show that GDP in the euro zone — the 17 nations that use the euro as their currency — rose 0.3% in the second quarter, a small but important gain that would mark an official end to recession there if growth continues.
There are other signs the worst may be over. In Germany, the engine of Europe, the economy has continued to chug along. In the U.K., growth in the service sector recently hit the highest point in nearly seven years. Sentiment on the economy throughout Europe has risen lately to a 15-month high, and retail sales have been rising as consumer wallets emerge from hibernation.
Even in battered Greece, the gloom is fading. The Greek economy is still shrinking, but the pace of contraction has been slowing for nine months. And Greece surprised economists recently by announcing that, so far this year, the government has taken in more money than it has spent on goods and services. Greece is still deeply troubled, but the threat of a chaotic exit from the euro zone has subsided and Greece no longer rattles financial markets with routine forebodings of tragedy.
A recovery in Europe will probably proceed much as it has in the United States: Big companies will enjoy it first, with the benefits trickling down to Rue Principale over time. Europe is already getting a fresh look from investors who feel beaten-down European shares may be a better buy than U.S. equities that by some measures are overbought. Investing firm BlackRock says funds investing in European stocks have finally begun to attract new money, after months of outflows.
“To the extent that investors have low expectations for Europe, positive surprises in the economic data should help support those markets,” Russ Koesterich, BlackRock’s global chief investment strategist, wrote in a recent newsletter. “This sort of trend is one of the reasons that we have been encouraging U.S. investors to take a closer look at international stocks.”
Europe still faces a long road back to prosperity, with a few nations in the euro zone still continuing to battle depression-grade woes. The unemployment rate in the euro zone, for instance is 12.1%, nearly five points higher than in the United States. In Spain, unemployment is a shocking 26.3%.
A convoluted structure
The euro zone also remains hamstrung by a convoluted political structure — or lack of structure — that makes the U.S. government seem crisp and efficient by comparison. There’s still no mechanism for forcing the euro zone’s 17 nations to cooperate on tax policy, spending priorities, debt issuance or other fiscal matters, for instance. And there could still be dust-ups over the ongoing bailout of Greece or aid requests by other countries, such as Spain.
Still, Europe appears to have muddled through the most severe threat to the euro zone since the union came into existence in 1999. “The hope for the euro zone is that current rising confidence encourages businesses to further pare back their job cutting and become more prepared to invest, and also encourages consumers to spend more,” economist Howard Archer of forecasting firm IHS Global Insight wrote recently to clients. One cause for optimism: The European Central Bank recently signaled it will maintain stimulative easy-money policies for at least another year.
Though Europe isn’t a huge trading partner of the United States, the deep slowdown there has held back the whole global economy. A turnaround won’t automatically trigger a global growth spurt, but it will remove a major barrier to economic progress. And once Europe gets out of its rut, the 2008 financial crisis will be over for good.
Rick Newman’s latest book is Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.
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