Economy 

Europe’s economy: on the road to recovery?

This article is part of
Guide to investing in Europe

Europe’s economy: on the road to recovery?

Europe appears to be firmly on the road to economic recovery after several consecutive quarters of GDP growth.

Investors in the region have been required to have a little more patience as Europe lagged the US and UK in terms of economic expansion.

Jeff Taylor, Invesco Perpetual’s head of European equities calls it a “broad-based economic recovery” taking hold in Europe. 

“In the third quarter of 2017, the region posted its 18th consecutive GDP quarterly expansion,” he points out. “On a yearly basis, latest GDP growth hit 2.5 per cent, the best since early 2011. 

“The drivers behind this recovery are predominantly domestic. This is a fundamental break from the recent past, when growth was largely dependent on exports to faster growing parts of the world.”

He confirms: “While Europe’s recovery from the crisis years kicked in later than in the US, it is now firmly on track thanks to a steady, expectations-busting pick-up in private consumption and more recently investment. Banks are lending again and unemployment is falling.”

Figure 1: EU28, euro area and US GDP growth rates, percentage change over the previous quarter

Source: Eurostat

Salman Ahmed, chief investment strategist at Lombard Odier Investment Managers, observes: “Growth in the Eurozone is at its strongest since 2011. 

“Moreover, growth hasn’t been this broad-based since the birth of the single currency, as evidenced by the very low dispersion of growth rates and Purchasing Managers Indices (PMIs). We expect domestic demand to remain the main driver of growth in 2018. 

“On the consumer side, a continued improvement in the labour market is likely to continue to support consumer spending.”

Brexit shock in store?

Russell Investments’ senior investment strategist Wouter Sturkenboom is equally convinced the economic recovery in the eurozone is not only firmly established, but also self-sustaining and robust. 

“As such, it would take quite a large adverse shock to knock the recovery off course,” he predicts. “We don’t expect that to occur, however.” 

The elephant in the room, of course, is Brexit.

Does a ‘hard’ Brexit scenario or simply the prospect of the negotiations being dragged out for longer, have the potential to upset Europe’s recovery? Or is the eurozone area largely immune? 

Mr Sturkenboom says: “We acknowledge that an acrimonious divorce between the UK and EU could certainly impact growth negatively, although it would probably not be enough to cause a recession. We don’t expect that to happen.”

The balance of trade between the UK and Europe may provide the answer as to whether Europe will feel any negative effects from the UK’s departure from the EU.

Brexit is a risk factor, according to Léon Cornelissen, chief economist at Robeco, who notes that 15 per cent of EU exports are going to the UK, so a Brexit-induced recession in the UK “would damage EU growth, probably without derailing the upswing”.