Out of recession, but not out of trouble

EurozoneThe eurozone has emerged from the longest recession since the founding of the monetary union, but concerns are increasing that yesterday’s GDP figures are not sustainable.

Led by stronger-than-expected growth in Germany, Finland and France, the eurozone grew by 0.3% in the second quarter.

Portugal also did well, surprising with 1.1% growth, according to Eurostat, the European statistics agency. Italy and Spain, however, posted negative growth numbers and remain in recession.

“If you then layer onto this the July business and consumer confidence indicators released in recent weeks, this would indicate that the recovery is continuing into the third quarter,” says Kevin Lilley, manager of the Old Mutual European Equity fund.

But not everyone was so hopeful. Stewart Robertson, senior economist at Aviva Investors, says the eurozone is still without the jobs growth evident in other recovering economies, such as the US and UK. Unemployment in the region has risen to 14%, if Germany is excluded, he says.

“There are reasons to believe that the GDP figure is not sustainable and might not be repeated in coming quarters,” Robertson says. “This is true for both France and Germany, where the uptick in growth can be attributed to a number of one-off factors, including a cold winter where energy consumption was high and construction activity distorted, as well as by spending being brought forward in anticipation of tax rises.”

Robertson adds that some leading indicators, including jobless figures, are “still worrying”.

Others looked ahead with a measure of caution. The main ingredient of a sustained recovery is confidence in the real world and the financial one, says Joe Dyer, senior fund manager at wealth manager RD Signature.

“A crucial factor will now be what happens with respect to the eurozone banking sector and whether lending to credit starved businesses and consumers can improve,” he says.

A big worry for investors in European assets is that the European Central Bank will tighten monetary policy in response to the improving economic conditions.

US Federal Reserve chairman Ben Bernanke has hinted that the Fed might begin tapering bond purchases this year. Equity prices dipped as a result while bond yields rose.

European equity and bond investors will be worrying about a similar effect in Europe.

Yet Azad Zangana, Schroders' European economist, says the central bank is unlikely to act in the near future.

“In terms of the impact on monetary policy, the better-than-expected growth figures, along with the encouraging signals from private business surveys, may start to place pressure on the European Central Bank to take a more hawkish stance,” he says. “However, only two months after the introduction of forward guidance and a significant amount of spare capacity, we doubt the ECB would consider tightening monetary policy anytime soon.”

©2013 funds europe