Euroland remains in the doldrums and a slow recovery is predicted due to persistently sluggish consu...
Euroland remains in the doldrums and a slow recovery is predicted due to persistently sluggish consumer spending.
Farida Hasan, global economist at Henderson, says: "We have downgraded our forecast for the Eurozone area because employment growth has been less sanguine. Although companies have restructured they are still under pressure to reduce costs because of the strength of the euro."
Although the strong euro has made imports cheaper and given consumers increased purchasing power, according to Hasan, the strength of the euro has not helped the consumer as much as it was once thought.
She says: "The European consumer is more focused on the labour market and is not confident to spend money until employment growth picks up. There is also speculation that the ECB will cut rates because of weaker domestic demand. She thinks the ECB will be forced to cut rates as inflation decreases.
"On the corporate side there is still pressure on margins, and companies still need to reduce costs. Companies are facing increasing competition from Asia, with its relatively stable currencies and low costs. Euroland exports are expensive compared to its Asian counterparts."
According to Jonathan Asante, chief economist at Framlington, the outlook for the European economy continues to disappoint.
Asante says: "After several months of strength, economic indicators are starting to decline. We cannot see any improvement in the short term, with European goods looking increasingly unattractive to overseas buyers due to the strength of the euro. Consumer confidence in Europe also remains fragile as employment recovery remains fragile. This means a consumer-led recovery is unlikely."
Hasan warns that Italy is lagging behind the most in Euroland. Domestic demand is poor, exports have come under pressure because of the currency and companies have not been able to reduce costs. France has also been disappointing. Although the outlook is improving, consumer demand is not picking up. Corporations in France have been in debt and have not been able to reduce spending.
However, Hasan thinks Germany is showing more signs of improvement than other Euroland countries, with companies making good progress in reducing labour costs. Germany will also benefit the most in terms of exports when the euro weakens.
According to CDC IXIS Asset Management, the manufacturing data for France and Germany suggests the recovery continues to take shape, although slowly. The disappointing economic indicators for manufacturing are only temporary because US indicators still point to an acceleration in demand that will benefit European manufacturers. Also, a closer look at European production and orders data shows that trade between domestic manufacturers is still rising.
The view at CDC IXIS is that in Germany, the increase in the production of intermediary goods and the decrease in the production of consumer goods show recovery is still limited to the manufacturing sector. CDC IXIS thinks an export-driven recovery in Germany will spread to the rest of the economy. The decline in the dollar which has been the greatest risk to this scenario, seems to be now less of a threat. European exports will generate investment which will generate employment thereby underpinning consumer spending.
Hasan says: "The major driver is global demand exports have been disappointing but as the euro weakens we may see some improvement." Structural reforms to implement change have come to a standstill in many countries such as Germany and Italy. She does not expect the situation to improve for the next year. Henderson currently has reduced its exposure to Euroland.
However, Asante thinks despite the gloomy economic outlook there are some bright spots. Framlington is currently favouring the telecommunications equipment sector which is benefiting from telecoms spending. Stocks include Ericsson and Vosloh as well as the German railway infrastructure company and Bank Austria.
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