The European Central Bank is expected to make rate cuts in response to bad news flow from countries ...
The European Central Bank is expected to make rate cuts in response to bad news flow from countries like Germany. The country recently announced higher unemployment figures and lower retail sales, factory orders and manufacturing output.
So far this year, the ECB has only cut rates by a quarter of a percentage point at its meeting on 10 May. The first cut in two years, which brought rates down to 4.5% from 4.75%, followed disappointing European economic data.
Andrew Hunt, global economist at Dresdner RCM, says: 'The data from Germany in the past month has been terrible. Orders have been cancelled and there appears to be nothing left in the German reserve.'
Going forward, Hunt believes there is little to support European growth and sees the cut by the ECB as too little, too late. With the slowdown in the US economy having an adverse effect on the rest of the world, he says, the downturn in Asian economies that took place in the middle of March is also likely to have a greater impact on Europe.
'Asia is an important trading partner for Europe and it has cut European orders,' he says. 'Asian export and production figures are as bad as they were in the Asian crisis in 1998. They are reducing imports further and Europe has been on the receiving end of that.'
Hunt says that while Europe was anticipating the US slowdown, the ECB had not realised how weak Asia would be. 'Asia is a good leading indicator to what happens in the rest of the world,' he says.
In the second half of the year, Hunt expects Europe to slow down, with earning downgrades the major market drivers.
'When the global recovery arrives, old industrial economy stocks will perform well,' he says. Until then, the second half of the year will see the ECB act as aggressively as the Fed has, cutting rates by at least 1% more.
However, the uncertainty shown by the ECB in cutting rates has manifested itself in differing views among the investment industry on the future for the eurozone.
While Hunt sees the start of an economic slowdown in Europe, Dino Fuschillo, co-manager of SGAM European Growth, is more optimistic.
'The rate cut was a surprise but it has pushed up the equity markets and inspired more confidence,' he says. 'A lot of Europe's growth is internal, so the effects of the US slowdown are limited.'
Fuschillo believes the next quarter is looking more positive but expects defensive stocks to underperform.
European fund manager at JP Morgan Fleming Tom Elliott is even more bullish, predicting Continental Europe is poised for long-term stock market outperformance. He says: 'It benefits in the short term from an undervalued currency in the shape of the euro and falling interest rates. GDP growth this year, although slowing, is likely to be stronger than in the UK, US or Japan.'
Although growth has slowed recently, Elliott says there is little chance of a hard landing in Europe. This is partly thanks to the relatively closed nature of the eurozone economy, he says, which protects it from a downturn in external demand.
Closed nature of eurozone protects it.
More cuts likely from ECB .
Growth to be stronger than US, UK or Japan.
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