Europe Seeing Green Shoots of Recovery | Capital Group


Investment Insights

November 2013

Europe Seeing Green Shoots of Recovery

A portfolio manager points to surprising signs of recovery in the U.K., Spain and other European nations, suggesting an optimistic outlook for the region. Expected growth for the German economy is further reason to hope for associated growth across the euro zone.



Mark E. Denning


Mark Denning: The U.K. is growing very strongly at the moment. It’s taken everybody by surprise. And what you’re seeing in Ireland, Spain — Spain’s taken everyone by surprise again. There are some signs of stabilization there. Spain has now got a current account surplus. Ireland’s got a current account surplus. And indeed, Spain’s now got a trade surplus. So Spain seems to be turning around.

The surprising thing in so many respects is that if you look at results year to date in Europe, they’re not up as much as United States’ in terms of stock market returns. For the euro, the euro has actually appreciated slightly versus the dollar, as has sterling; it’s very slight, just a little bit. And yet all the other currencies around the world are doing the opposite, which tells you one of two things: either that Europe is looking like it’s really recovering fast or that, in spite of this recovery, credit remains quite tight in Europe — and the euro is a relatively rare currency in that sense, that it’s still running tight, tight policies.

I think the outlook for Europe is nowhere near as dire as people are making out, and we really are beginning to see those signs of recovery. Germany, I think, is going to be a very, very interesting economy in 2014. You’ve got wages going up 5%; you’ve got the industrial indicators very positive. I think you can see consumption growing quite rapidly in Germany over the course of the next 18 months, and on the industrial front, things continue to improve. So it’s a reasonably benign outlook for Germany and indeed, you could make the argument, for the rest of Europe, because if Germany starts really moving, then it brings up the rest of Europe by its coattails.

And the U.K. has just surprised everyone. We just started talking to companies about three or four months ago, and they were saying, “Oh yeah, big turnaround in the U.K.” And as you look at it, it’s a similar turnaround to what’s going on the United States. The housing market is coming out. The government enacted a purchase scheme that’s allowing first-time buyers to get on the buying ladder, and that seems to have ignited, not a frenzy, but a real pickup in housing demand in the U.K. You look again at the industrial indicators: Exports are up, and industry is doing quite well. And the service industry is now picking up quite, quite rapidly.

So there are reasons to be optimistic about what’s going on in Europe. It’s not to say it’s going to be like that, because you’ve got politics to deal with and you’ve got lots of different nation-states arguing about this, arguing about that, which makes it all the more difficult. But that’s what democracy is about.

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