After a tricky period post the financial crisis Europe had seemed to be getting on top of things.
Aside from that pesky deflation issue, now being targeted by the European Central Bank (ECB) and Mario Draghi with measures including the targeted long term refinancing operation (TLTRO), it looked like economic recovery had arrived on the continent.
But it may have been a premature celebration, with latest growth figures from France and the so-called ‘powerhouse’ of Europe, Germany, both disappointing the market.
French GDP growth in the three months to June was flat at 0 per cent for the second successive quarter, with growth in the country last recorded in the last three months of 2013 when it reached 0.2 per cent.
Meanwhile Germany recorded its first economic contraction since the first quarter of 2013. It recorded a contraction of 0.2 per cent in the three months to June, while first quarter growth was below par at just 0.7 per cent.
Just as the periphery starts to make ground its seems a slowdown in the core of Europe could push them back to the brink, with Italy also recording a contraction of 0.2 per cent in the second quarter.
Germany noted, however, that one of the possible reasons for the contraction in growth was the “extremely mild weather leading to high growth rates at the beginning of the year.”
But just as one problem seems to be solved, another rears its head, this time in the case of the increasing tension between Russia and Ukraine and consequently the rest of the world. Russia itself has seen its market falter, with the sanctions announced earlier in the year rattling some investors, while others look to opportunities the cheap valuations can offer.
For the year to date to August 28 the MSCI Russia index has seen a decline of 13.28 per cent, while the rest of the Brics countries – Brazil, China and India – have seen a more positive performance, with even the MSCI China delivering a 7 per cent return. This suggests geopolitical turmoil is weighing heavily on investor sentiment.
Not that there isn’t hope for Europe, however, with Mario Draghi and the ECB determined to try and pull the region back from any serious mis-steps, as he delivered strong rhetoric at the Jackson Hols Symposium in August.
Wouter Sturkenboom, Europe investment strategist at Russell Investments, says: “Mario Draghi’s recent speech shows that the ECB is still willing to pursue more monetary stimulus as well as push for more fiscal leniency to ensure the European economic recovery continues. We believe the ECB will continue to boost the eurozone business cycle, but in a reactive as opposed to proactive manner.”
But Gary Kirk, founding partner and portfolio manager at TwentyFour Asset Management, notes the speech did not contain any ‘eureka’ moments.
“Mr Draghi voiced real concerns about the persistent low inflation and high unemployment levels in the eurozone, and suggested that the ECB is pushing for greater flexibility and will continue to lend active support to try and revive the ailing European economy.”
Mr Kirk notes the president of the ECB also suggested it would be helpful for fiscal policy to play a greater role alongside monetary policy, although with 18 national budgets to consider this could be a complex issue.
“Clearly Mr Draghi is concerned about what he sees as a diverging path of US and European monetary policies and this is likely to see the ECB step up their stimulus package to try and breach this widening gap. The big question is what can he do and what will be the result. One result of a more proactive stimulus should be a weaker euro, which will help drive exports and possible import a bit of external inflation,” says Mr Kirk.
“The one firm conclusion is that the ECB are about to engage on a more proactive set of policies to stimulate the eurozone economy. Whether this is from active asset purchases or accommodative monetary action the result will be a more supportive backdrop for credit.”
It looks like the eurozone on both an economic and political level could be the place to watch for the rest of the year to see what impact both Mr Draghi’s policies, and the geopolitical turmoil in the east of the region will have on investors and the markets.
Nyree Stewart is features editor at Investment Adviser
