Rising from the doldrums

Europe is set to come out of the doldrums as global growth picks up in the second half of the year.

Roger Guy, senior investment manager, European Equities, at Gartmore, says: 'Global growth had been slowing even before the events of 11 September, and that trend has since accelerated as consumers and businesses have cut back on expenditure. But continental Europe, and the UK for that matter, is a beacon of hope amidst the global gloom.

'Not only do we believe the Eurozone economy will avoid recession, it will grow by around 1.5% both this year and next. We expect the downturn to bottom out in the first six months of 2002, with economic growth beginning to accelerate in the second half of that year.'

A number of factors support his relatively optimistic view of Europe's short-term economic prospects: the European Central Bank (ECB) has cut interest rates three times this year, by a total of one point to 3.75%. Consequently, the ECB has much greater scope than the Federal Reserve to lower interest rates again and create an extra stimulus to economic activity. Gartmore expects eurozone rates to fall by another 0.75% by the end of the year.

Although inflation in the Eurozone is still above the ECB's target of 2%, a clear downward trend has emerged in recent months and Guy expects this to continue. In particular he thinks slowing global growth will result in weaker demand for energy, thus ensuring that oil-prices and energy costs remain low for some time.

Alister Hibbert, manager of the Invesco Perpetual GT Continental European fund, agrees the situation for Europe is positive.

He says: 'Discounting any further geo-political surprises, any downturn is unlikely to be as deep in Europe as in America because it is suffering less from the after-effects of economic and financial excess. Europe has seen less over-investment, and both corporate and individual balance sheets are less stretched.'

Hibbert thinks that as world growth is expected to recover in the second half of next year, Europe should benefit from a number of positive themes.

In the US, negative real interest rates and this year's fiscal stimulus of the order of US$100bn should generate a substantial rebound in economic growth next year. Just as Europe suffered from the shock waves produced by a slowing US economy in 2001, so it should benefit from stronger US growth next year.

Second, in Europe's domestic economy, the dynamic should improve as this year's tax cuts and lower interest rates begin to underpin growth in consumer spending. Improved trading conditions for both exporters and beneficiaries of domestic consumption growth should underpin and indeed boost earnings for European companies.

Joanne Frearson

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