Home' Trinidad and Tobago Guardian : April 12th 2015 Contents SBG14 THE ECONOMIST
SUNDAY BUSINESS GUARDIAN www.guardian.co.tt APRIL 12 • 2015
Less than a year ago, most
global investors looked at
stagnant Europe, shuddered
and passed by. Now Euro-
pean share prices are soaring.
The euro area s top 50 blue
chips gained almost 18 per
cent in the first three months
of the year. American mutual funds are yanking
their money out of other assets to invest it in
European stock markets, and more cash may
be heading the continent s way: In January a
net 18 per cent of the global fund managers
regularly polled by Bank of America Merrill
Lynch chose Europe as the region they would
most like to go overweight on in the coming
12 months. In March 63 per cent did so.
In part this newfound enthusiasm for Old
World equities simply reflects drearier prospects
elsewhere, plus a bet that the quantitative easing
belatedly launched last month by the European
Central Bank, which plans to buy US$65 billion
of financial assets a month until September
2016, will raise asset prices in the euro zone
as similar programs did in America and Britain.
However, it also is a response to signs that
the euro zone, long a drag on world growth,
is starting to help it.
One cause of the turnaround is the weakness
of the euro, which has fallen by 12 per cent
against the currencies of the zone s principal
external trading partners in the past year. The
euro area is a net exporter of goods, and the
currency s weakness is helping it to sell more
Another is that the price of crude oil has
fallen, even against a weakening euro, cutting
companies energy and raw-material costs and
raising consumers purchasing power. The ECB s
bond-buying is pushing already-low borrowing
rates even lower. Credit conditions are easing,
including for small and medium-sized com-
European business activity is increasing at
its fastest pace since May 2011, according to
Markit s latest composite purchasing-managers
index, with new orders driving growth in man-
ufacturing and services. Retail sales are rising
too.Economists are falling over themselves to
revise their growth forecasts upward. The region
as a whole grew by a mere 0.9 per cent in 2014.
The Organisation for Economic Cooperation
and Development, a rich-country think tank,
now reckons that the euro area will grow by
1.4 per cent in 2015 and by two per cent in
2016. The ECB and the credit-rating agencies
and investment banks think along similar lines.
Germany, where real wages are rising, will do
most to pull the euro zone out of the mire, but
France and Italy, hitherto laggards, are expected
to show slightly perkier growth too. Spain s
central bank thinks that its economy could
expand by as much as 2.8 per cent this year.
All of this is helping companies which produce
the goods and services that customers buy
when they have a little more cash in their wallets
and a little more confidence in the future. Ana-
lysts are upgrading earnings estimates for car-
makers and their suppliers, technology com-
panies, hotel and leisure groups, media and
financial-services firms, with health care and
chemicals joining their ranks, said Sharon Bell
of Goldman Sachs, an investment bank.
The benefits of this changing mood are not
evenly distributed, however. Much depends on
size, sector and sales patterns.
Start with size: Europe s myriad small com-
panies are still in a wait-and-see mood, rather
than a go-for-growth one. An index of business
conditions compiled by Ueapme, a small-busi-
ness lobbying group, has been inching upward
since early 2013. Chloe Magnier of CM Eco-
nomics, a research company, explains that bigger
firms always benefit first from an uptick in
demand. It takes time before they pass orders
on to smaller suppliers.
Larger companies also are more likely to reap
gains from a weaker euro. Sanofi, a French
drugmaker, reckons that foreign-exchange
movements added 3 per cent to its revenue
growth in the fourth quarter of 2014. Though
many large European companies hedge their
currency exposures to some extent, both by
using financial instruments and by moving
production to where their customers are, almost
all enjoy a boost to their bottom lines from
translating foreign-currency earnings back into
a weaker home currency.
Sector is the second determinant of success.
Among those benefiting from lower oil prices
is Continental, a German maker of car tires
and other parts. Its chief financial officer, Wolf-
gang Schafer, said that cheap fuel has been
especially helpful in America, where sales of
new cars have soared.
In Europe it has prompted an increase in
miles driven, which means more tires needing
replacement. Last year sales of new cars began
growing again in the European Union, after
falling for six years. The recovery should speed
up this year.
Although so far this year automotive share
prices have risen most vertiginously of all the
Stoxx Europe 600 sectors, the reverse is true
for oil and gas stocks. Total, a French oil com-
pany, reported sharply lower revenue in the last
three months of 2014, for example, and has
been busily downsizing since then. Companies
that make capital equipment destined for the
oil sector are struggling too.
The big question is not whether the euro-
zone economy can grow, given the current,
extraordinarily favorable combination of a cheap
currency, low oil prices and low financing costs.
It is whether that expansion will be self-sus-
taining by the time the euro and oil prices
steady and the ECB s bond-buying stops.
Have countries and companies cleaned house
sufficiently during the dark days since 2008,
liberalizing labor and product markets, cutting
taxes and red tape on the one hand, and stream-
lining corporate structures, processes and costs
on the other?
Klaus Wiener, chief economist at Generali
Investments Europe, is among those who believe
that a rising tide of higher exports and improving
domestic demand eventually will raise all boats,
but at different speeds. Countries that have,
in particular, made their labor markets more
flexible offer the best chances of success. Their
ranks include Germany and Spain. Italy has
recently embarked on serious reform after a
decade and a half of stagnation. To many for-
eigners with cash to spend, it is now the bloc s
most interesting market, with France a big step
Companies that have reduced costs, become
more efficient and expanded into new markets
far beyond their home countries will enjoy the
biggest gains. In other words, Europe s recovery
will most benefit those businesses and places
that have used the crisis to become less Euro-
pean. @2015 The Economist Newspaper Ltd.
Distributed by the New York Times Syndi-
European business and the recovery:
Green shoots, risk of frost
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