Multi-Asset

Global Perspectives - April 2019

For Europe in 2017, everything looked bright and promising. 2018, however, saw a change in fortunes
April 2019

Risk Disclaimer

The value of investments and any income derived from them can go down as well as up as a result of market or
currency movements and investors may not get back the original amount invested.

Views and opinions expressed by individual authors do not necessarily represent those of BMO Global Asset Management. The information, opinions estimates or forecasts contained in this document were obtained from sources reasonably believed to be reliable and are subject to change at any time.

For Europe in 2017, everything looked bright and promising. There was a synchronised upturn in economic growth,trade between Europe and the rest of the world was strong, and the euro was strengthening. 2018, however, saw a change in fortunes, as the synchronised growth environment evaporated.

Both domestic and external demand weakened notably for Europe, and the US once again outpaced the rest of the world. In the latter half of 2018, there was a host of political issues in Europe, including Italy’s budget negotiations and Macron’s forced retreat by the ‘gilets jaunes’ in France. Couple this with a bout of markedly weak data from the region and you have the ingredients for decidedly jittery investors. Cue an instant leap to the conclusion that there are fundamental issues with the eurozone economy and that the ‘Japanification’ of Europe (the move to an environment of prolonged low growth and low inflation, coupled with an abundance of central bank liquidity) is around the corner.

But this is not necessarily the case.

The weakness is idiosyncratic and temporary

German data in particular has been weak, and as the largest economy in the continent, this understandably caused concerns. The German auto industry drove economic slowdown six to nine months ago. But the balance of new orders to inventories is now rising and the impact of various regulations are starting to fade, so this industry appears to be at an inflection point. Other sectors continue to lag but there are hints of recovery that could signal German and European activity could be on the increase.

In the latter half of 2018, there was a crash in the German pharmaceutical industry, which many took as a signal of fundamental issues with the German economy. There were reasons for the sharp dip but these all fall into the temporary category, and the sector is now on the up.

The German chemical sector also dipped notable as the Rhine itself dipped below levels at which barges could continue to transport materials and end products. This of course was a temporary and the necessary rain has since fallen.

Reasons to be cheerful

German data in particular has been weak, and as the largest economy in the continent, this understandably caused concerns. The German auto industry drove economic slowdown six to nine months ago. But the balance of new orders to inventories is now rising and the impact of various regulations are starting to fade, so this industry appears to be at an inflection point. Other sectors continue to lag but there are hints of recovery that could signal German and European activity could be on the increase.

In the latter half of 2018, there was a crash in the German pharmaceutical industry, which many took as a signal of fundamental issues with the German economy. There were reasons for the sharp dip but these all fall into the temporary category, and the sector is now on the up.

The German chemical sector also dipped notable as the Rhine itself dipped below levels at which barges could continue to transport materials and end products. This of course was a temporary and the necessary rain has since fallen.

There remain risks, but we could see a bounce

We believe that the negative sentiment on the recent weak data out of Europe is overdone, and in fact it highlights troughs in several industries, meaning that we should see a bounce in European data in the coming quarters. As ever, there are factors that could cause us to reassess our current optimism. 

The political element in Italy may have been resolved in the form of the agreed budget, but the debt issue is still there and has the potential to push yields on government bonds to untenable levels, prompting downgrades and impacting the country’s ability to raise funds on the bond market.

The labour market in Europe is strong and real wages have been increasing as headline inflation has fallen. Should this happy medium turn, either from a bump in inflation or a tick-up in unemployment, then this would also lead us curb our enthusiasm for the region. For now, however, we remain cheerful.

Risk Disclaimer

The value of investments and any income derived from them can go down as well as up as a result of market or
currency movements and investors may not get back the original amount invested.

Views and opinions expressed by individual authors do not necessarily represent those of BMO Global Asset Management. The information, opinions estimates or forecasts contained in this document were obtained from sources reasonably believed to be reliable and are subject to change at any time.

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