Why the Eurozone recovery still has to gain momentum
Europe’s economic downturn has followed a relatively reasoned path. First, it affected some of the Eurozone’s smallest and most peripheral economies like Greece, Portugal, and Ireland. Then it moved to larger economies like Spain. To a certain extent, it also moved to the Netherlands and Finland. Currently, it’s concentrated in the second and third-largest economies in the Eurozone—France and Italy.
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The impact of Europe’s economic downturn on these countries is also reflected in the performance of popular exchange-traded funds (or ETFs) like the iShares MSCI Italy Capped ETF (EWI), the iShares MSCI Ireland Capped (EIRL), and the iShares MSCI Spain Capped (EWP). These ETFs track the broad stock market performance in these specific countries. ETFs like the Vanguard FTSE Europe ETF (VGK) and the iShares MSCI EMU Index (EZU) track the broad stock market performance of Europe in general.
Recovery needs to gain momentum
The Eurozone recovery still needs to gather momentum. The gross domestic product (or GDP) in Europe only increased by 0.2% in 1Q14.
Slow Eurozone retail sales growth and weak industrial production data have held back the rate of recovery. Even the previously strong recovery in Germany is losing momentum. It contracted by 0.2% in the second quarter this year. The national level GDP data released for the second quarter in Italy, Spain, and Belgium has tended to be softer-than-expected with average growth of 0.2%. Recent activity indicators from France have also been soft. As a result, the Eurozone recovery remains weak and patchy.
Headwinds that are impacting the rate of economic growth include:
- the ongoing deleveraging by the private sector
- tight fiscal policy
- restrictive credit conditions
Recovery among the Eurozone nations
Among the Eurozone nations, countries that have implemented structural reforms and improved their competitiveness include Spain and Ireland. They have outperformed other peripheral Eurozone nations. Countries like Italy and France, that have been slow and unwilling to embrace reforms, have been a drag on the wider Eurozone economy.
Considering the Eurozone’s humble rate of recovery, interest rates in the area will most likely remain very low for a prolonged period of time. This will spur economic activity. The next part of this series explains why European yields are at an all-time low.