Poor GDP numbers cause pull-back from Euro equities

European flagsInvestors correctly anticipated lower European GDP figures and pulled money out of the region's equity markets last week, but a fund management economist argues that stronger growth will resume.

Investors pulled more money from European equity funds in the week ending August 13 than in any other week in the last two years.

According to data firm EPFR Global, which provided the data, investors were correctly anticipating poor GDP numbers released at the end of the week.

These results included the German economy shrinking by 0.2% in the second quarter and the French economy continuing to stagnate, a finding that prompted the French finance minister to declare growth in Europe was "broken".

European bond funds, unlike equities, gained an inflow of nearly $2 billion (€1.5 billion) in the week as investors reasoned that the poor GDP data would force the European Central Bank (ECB) into further quantitative easing.

Not all economists would argue that the Q2 numbers indicate a failed recovery, however.

"While the aggregate GDP results are disappointing, it is worth remembering that the first quarter was unusually strong thanks to a very mild winter which boosted construction activity, particularly in Germany," says Azad Zangana, European economist at Schroders. "Therefore, a pull-back in activity was always likely in the second quarter and should mean that the third quarter is stronger."

Zangana says he expects growth to accelerate in the second half of the year, noting a rise in monthly industrial production numbers over the second quarter. He has also noted an improvement in credit conditions and a rising demand for borrowing, according to the latest credit conditions survey by the ECB.

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