Conversely, the eurozone has started to perform better than estimates. Of course, Europe has lagged the US recovery markedly and is probably due a catch-up.
The cause of the diametrically opposite moves is currency.
The dollar has been strong recently, while the euro has been comparatively weak – first as a result of talk and then action on quantitative easing (QE) from the European Central Bank (ECB). If there is one thing Germany and Greece can agree on, it is that a weaker euro should help combat deflation and drive export-led growth.
It is the best medicine for the eurozone economy. Nor is this an abstract economic effect: a weaker euro is a very real impetus for European corporate earnings, and converts what was a headwind a year ago into a tailwind.
It’s been predicted that the euro would remain relatively weak against sterling: Europe was the only region not to have engaged in QE and would probably end up using this mechanism eventually. The Bank of England has finished its QE programme and its next step will be raising interest rates, but it is unlikely to raise rates before the US.
Neither the employment situation nor inflation rate currently demands a rate rise in the UK. Inflation remains extremely weak, although it is worth noting that UK core inflation (ie food and energy) is considerably more robust than the headline consumer prices index, which may indicate that we are approaching the nadir of inflation.
Having announced QE, Europe now faces something of a travel-and-arrive story.
Nonetheless, as a suboptimal currency union without a single finance minister, the euro is unlikely to discover a hidden source of strength imminently. With populist parties on the rise everywhere from Spain to Germany, lunatic plans for debt restructuring will occasionally be put forward.
This is not to say the picture is straightforward for sterling: The UK runs large twin deficits on the current account and budget. The current account looks worse now than at any time in at least 60 years, possibly ever.
It gets little attention, but could store up trouble. The other deficit is linked to the election, which is next month and could potentially lead to a coalition of Labour and more left-wing parties, which are perceived to be less concerned with addressing the deficit – at which point sterling’s fundamental flaws may be exposed, at least for a while.
Overall, the euro seems likely to maintain long-term weakness relative to sterling, which has thus far only retraced around half of the mid-crisis drop.
Between today’s currencies, it often seems a contest of the least bad. Given potential interest-rate trajectories, the ECB is unlikely to raise rates in the foreseeable future.
With UK gilts yielding 1.7 per cent compared to just 0.66 per cent for French bonds, it is clear how sterling might attract international flows hunting for yield.
This notwithstanding, currencies are notoriously difficult to call. We have a 50/50 chance of getting it right – at best.
Olly Russ is manager of the Argonaut European Income fund
