This year, for the first time in a decade, the European economy is poised to deliver better GDP grow...
This year, for the first time in a decade, the European economy is poised to deliver better GDP growth than America.
In these days of increased globalisation and liberalisation, Europe cannot escape the effects of the US slowdown. Any sharp fall in US economic activity will have an impact on the region, and this is reflected in recent cuts in eurozone GDP estimates. Even European Central Bank members who had stubbornly proclaimed that the region could avoid the worst of the US shakeout are now recognising a correlation between the European and US economies.
Revised consensus forecasts now suggest European growth will fall from over 3% in 2000 to 2.5% for 2001. However, although that cannot be completely discounted, there are several reasons to believe forecasts for eurozone activity have now been revised far enough downwards.
The first reason is that massive tax cuts are expected throughout Europe during 2001. This factor alone could provide a boost to growth of 0.5% over the year. Given that the consensus forecast for European growth of 2.5% already incorporates the anticipated boost, this suggests underlying activity will be incredibly weak. In other words, the anticipated low levels of growth are already built into current market estimates. There seems little reason to believe that things will be even worse than this.
Second, Europe did not over-invest in information technology to the same extent as the US. In fact, Europe lags considerably in this respect and actually needs to catch up and accelerate its IT investment.
Another issue that should not be discounted is the full implementation of the euro on 1 January next year, and the conversion of national banknotes. Even if just a fraction of the (alleged) vast sums of money currently residing outside the European financial system is returned to the real economy and put into tangible assets before the conversion takes place, the impact on consumption figures could prove substantial.
Finally, much has been made of the waning demand for European exported goods and services given current woes in America and Japan. The effect is undeniably being felt, especially in Germany. However, it is worth bearing in mind that only 15% of total European exports actually leave the region. The remaining 85% finds its way into neighbouring European countries and will be largely unaffected by reduced demand from US consumers or a debt crisis in the Japanese banking system.
Consequently, European optimism is well placed and, given the arguments outlined above, the region will indeed prove to be an economic safe haven in 2001. Despite concerns to the contrary, what we are currently witnessing on the continent is nothing more than a cyclical slowdown.
Mark Peden is head of European Equities at Aegon Asset Management
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