Europe’s economic miracle

With very little fanfare, Europe is slowly moving back into a growth phase.

Summary: The first signs of fiscal recovery in Europe became evident this week as GDP data showed the Eurozone had recorded slightly growth in the second quarter. Germany and France are actually outpacing growth in the United States, signalling that fiscal recovery is underway across the Continent.
Key take-out: With China stabilising, and the United States and Europe recording growth, the bull market is getting stronger legs.
Key beneficiaries: General investors. Category: Economy.

Europe reported its first positive GDP growth outcome on August 14, following a long-suffering recession created by the sovereign debt crisis of recent years.

With virtually no fanfare from the markets or the media, this event seems to have almost slid under the radar. But it is an outcome that is indeed a global game-changer, especially for stockmarkets.

The Eurozone as a whole grew by 0.3% in the second quarter, after contracting by the same amount, 0.3%, in quarter one. This means there has been no growth in the first-half of the year, and explains why many economists are reacting rather mutedly. They miss the essential point however, that Europe is growing!

The very good fundamental news is that it is the largest economies, Germany and France, that are leading the way with 0.7% and 0.5% GDP growth respectively. This is equal to, and greater than, that of the United States. Consider what all the doomsayers had been forecasting for now, consistently over the last several years, that Europe would be in deep recession, even depression, and that the euro was supposed to have disintegrated. In this context, positive GDP growth should be seen as an economic miracle.

Remember all those global banks telling everyone that it was certain that Greece would leave the euro, and the currency would collapse. I remember debating the chief executive of Roubini Economics on stage, in front of a distinguished audience from across Europe, at the height of the crisis. The other party trotted out all the usual panic about how big the numbers were, and the various authorities simply were not doing enough.

I pointed out there was a political imperative, as well as an economic one, which would keep Greece in the euro and the euro strong. In any case I said, what was being done was very thorough and transparent, refreshing really, and would over time resolve the situation. At the end of the debate I had people approaching me and saying that they did not know there was an alternative view to disaster, let alone a bullish one.

I have been bullish on the US, and indeed global stockmarkets since March 2009, and remained so through the European sovereign debt crisis, because of my expectation that Europe would hold, and begin to grow again. Here we are!

This is indeed a watershed moment in world history, and will be noted as such by historians when they review these first few decades of the century. Europe moving into, albeit the early stages of, expansion is the final piece of the puzzle.

It is quite a bright picture that emerges; one of a healthy and prosperous world economy. This is where we are right now. For those who recognise this positive outlook as being merely a reasonable one, there is the opportunity to reap significant profits. Not only are most market economists, commentators, and participants trying to play down and ignore the event, they are not at all positioned for the massive expansionary phase of global synchronised economic growth that this data heralds.

To some degree financial markets have understood this for some time, at least in price, though definitely not in terms of sentiment. This is why we have had such strong bull markets across Europe over the past year.

In fact, all through the sovereign debt crisis period, corporate profits continued to increase at around 10% per annum, though this was rarely given much media attention. Now, with greatly tightened balance sheets, the private sector of Europe is well positioned to reinvigorate the various economies of the union.

This will be a private-sector and consumer-led expansionary period in Europe. In much the same way as US consumers regained the confidence that they would keep their jobs, so too will Europeans, especially as they begin to see economic growth. Those with jobs will first drive the recovery. In response, healthy businesses will seek to expand their market share through investment and hiring, and so a constantly improving cycle of economic activity begins.

With China stabilising, the US clearly already in an expansionary phase, and now Europe coming back on line as well, stockmarkets have a good deal of catching up to do to reflect this rather different and more positive reality.

The “Grand Bull Market” that began, as I called it at the time, back in March 2009, still has many years to run, and to lofty levels no one imagines.

Clifford Bennett writes The White Crane Report. Contact him directly at clifford@cliffordbennett.com.au regarding his service.