The Eurozone has avoided “the worst” as Germany has escaped a technical recession by the skin of its teeth. Europe’s woes show that the global economy has been bent out of shape, but isn’t broken, as the U.S. and Asia prove.


1. Equity markets are rather unperturbed by Europe’s slowdown, but bond markets are pricing in reduced growth expectations.

U.S. equity markets have been lifted by an agreement on border security funding which means there won’t be another partial government shutdown. Likewise, there are renewed hopes for an eventual breakthrough in the tariff dispute with China, even if the deadline set for March 1 has to be extended. While corporate earnings are no longer as buoyant as last year, and indeed slowing down, investors are, for now, preferring to focus on the positive economic fundamentals (page 2). This sentiment is reflected in continued USD strength and contributes to our expectation that the Fed’s current wait-and-see attitude will once again turn more hawkish in the months and quarters to come.

 

2. The U.S. has equally avoided “the worst”, i.e. another government shutdown. Even an agreement on trade may be in sight.

Europe keeps battling its economic demons, to which some further political uncertainty was added this week in the shape of a likely snap election in Spain. While a technical recession has been avoided by a hair’s breadth in Germany, the region remains in the grip of a cyclical downturn, while at the same time long-running structural problems in several member countries have remain unresolved, as a comparison of global growth rates over the past twenty years shows (page 3). Meanwhile, the ECB is becoming more cautious in its wording with each new public statement. Is a change in monetary stance on the cards? Officially, the ECB is still due to raise interest rates later this year. Central and Eastern Europe is not immune from the continent’s slowdown. Bulgaria, Hungary, Poland and Slovakia saw weaker GDP growth in Q4 in both seasonally adjusted QoQ and YoY terms, driven by falling net exports, even though domestic demand held up relatively well. Meanwhile the UK, while no closer to a resolution in the Brexit negotiations, has seen inflation dip below the Bank of England’s target, easing last year’s concerns that wage growth was trailing behind the increase in the cost of living.

 

3. Export growth in China has staged a roaring comeback, renewing investor confidence in the Chinese economy’s “soft landing”.

Similarly positive sentiment has spread through China, albeit for different reasons. Export growth has held up unexpectedly well in January in spite of the restrictions on trade with the U.S. Growing exports towards neighboring Asian countries and the EU more than made up for the reduction in exports to the U.S. Meanwhile, the Chinese economy keeps benefiting from fiscal and monetary stimulus measures.

 

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