What a difference 12 days makes! Less than two weeks ago, financial commentators we follow were debating whether the eurozone was in a technical recession, citing sequential quarterly gross domestic product (GDP, a government-produced measure of economic output.) drops in Q4 2022 and Q1 2023.[i] The bloc’s official arbiter—the Centre for Economic Policy Research’s Euro Area Business Cycle Network (EABCN)—hadn’t weighed in and doesn’t even use that criteria, but such technicalities didn’t stop chatter in the publications we read. But then the eurozone’s economic statistics agency, Eurostat, revised Q1’s result from a -0.1% drop to an ever-so-slight advance that rounded to 0% q/q and 0.1% annualised.[ii] Then, on Monday, Q2’s preliminary GDP report said output grew 0.3% q/q (1.1% annualised), hitting a new high to boot.[iii] Yet, despite this undercutting the eurozone is in recession narrative from two points of view, commentators we follow don’t seem to have brightened their economic outlooks. Several still warned of stiff headwinds in Germany, weak growth and stubborn inflation (broadly rising prices across the economy). In our view, this is good news: It suggests sentiment still hasn’t caught up to reality, leaving more of the proverbial wall of worry for eurozone stocks to climb.
In our view, pedestrian is probably the best word to sum up the eurozone’s combined Q2 growth. We think it is fair to say 0.3% q/q isn’t much to shout about, and it lags US growth.[iv] Yet our research suggests stocks don’t hinge on absolute results—it is much more about how results compare to investors’ expectations, in our view. From that standpoint, to the extent that combined eurozone GDP figures even mean much, we think results this year to date are pretty darned good. This time last year, most forecasts we saw projected the eurozone would suffer a recession as energy shortages and spiking prices hammered businesses and households alike.[v] The European Commission’s November 2022 forecasts, probably the most optimistic of the bunch, projected “the euro area and most Member States [falling] into recession in the last quarter of .”[vi] It anticipated a recovery beginning this year, but only enough to deliver full-year growth of 0.3%.[vii] That happens to be the bloc’s year-to-date growth at the halfway point.[viii]
With loan growth slowing below the inflation rate—signalling contractionary monetary conditions in real (inflation-adjusted) terms—the economy could yet slip as the year rolls on.[ix] But we think that has also been the case for several months and for now, at least, things are clearly going better than expected. Not only at the regional level, but at the national level, too. Also contrary to the Commission’s forecasts, 13 of the current 20 euro members grew in Q4 2022 and a slightly different cast of 13 grew in Q1.[x] Of the 10 reporting for Q2 thus far, only Italy, Latvia and Austria contracted.[xi] So forecasts of widespread national recessions didn’t come true. We think this has a lot to do with eurozone stocks soaring 30.5% in pounds since their low last October 2022.[xii] In our view, this makes global stocks’ 12.2% return over the same period look less impressive.[xiii] It didn’t take an economic miracle. A slow regional plod sufficed.
That slow regional figure also masks more varied national results. We think Ireland epitomises this, as the country almost singlehandedly drove the eurozone’s big Q1 revisions. Not because actual Irish output fluctuated bigtime, but because Irish GDP is skewed by pharmaceutical companies that domicile there for tax purposes—their international production gets tallied in Ireland since that is where the patents live.[xiv] So when Ireland initially reported a -4.6% q/q GDP decline for Q1, it swung eurozone GDP from a preliminary estimate of slight growth to slight decline.[xv] When Ireland’s contraction was revised to -2.8%, it flipped eurozone GDP back to positive.[xvi] Its 3.3% q/q growth had a similar effect on Q2 eurozone figures.[xvii]
But positivity was broad based. France grew 0.5% q/q, accelerating sharply.[xviii] We wouldn’t read too much into this, considering a lot of the growth came from delivery of a single cruise ship, but still, growth.[xix] Spain continued its strong run with 0.4% q/q.[xx] Even Germany got in on the fun, arresting its GDP slide with a flat reading.[xxi] Of the four biggest economies, only Italy contracted, with a -0.3% decline following Q1’s 0.6% growth.[xxii] But overall, it looks like the stronger nations are helping pull the weaker along.
In this way, we think the eurozone is a microcosm of the larger world economy: Gritting through lingering headwinds and eking out growth as pockets of strength more than offset pockets of weakness, defying recession forecasts. Better still, a lot of those recession forecasts aren’t going away—economists we follow have just continued pushing the start date back. Meanwhile, publications we follow heavily covered the International Monetary Fund (IMF) raising its global growth outlook last week, but it was one of the most pessimistic upward revisions we have seen recently.[xxiii] In our view, it all points to guarded, sceptical sentiment, consistent with a young bull market (a long period of generally rising equity prices) and more wall of worry to climb.
[i] Source: Eurostat, as of 31/7/2023. A recession is a period of contracting economic output.
[ii] Source: Eurostat, as of 20/7/2023. Annualised refers to the rate at which eurozone GDP would grow or contract over a full year if the reported quarter’s growth rate persisted for four quarters.
[iii] Source: Eurostat, as of 31/7/2023.
[iv] Source: US Bureau of Economic Analysis, as of 31/7/2023.
[v] “Economists Say a Euro-Zone Recession Is Now More Likely Than Not,” Carolynn Look and Harumi Ichikura, Bloomberg, 15/8/2022. Accessed via Financial Post.
[vi] “Autumn 2022 Economic Forecast: The EU Economy at a Turning Point,” European Commission, 11/11/2022.
[viii] See note iii.
[ix] Source: Eurostat and European Central Bank, as of 31/7/2023. Year-over-year inflation rate and private sector loans adjusted for loan sales, securitisation and notional cash pooling, June 2023.
[x] Source: Eurostat, as of 31/7/2023. Statement based on eurozone countries’ GDP, Q4 2022 – Q1 2023.
[xi] Source: Eurostat and FactSet. Statement based on eurozone countries’ GDP, Q2 2023.
[xii] Source: FactSet, as of 31/7/2023. MSCI EMU Index returns with net dividends in GBP, 13/10/2022 – 28/7/2023.
[xiii] Ibid. MSCI World Index returns with net dividends in GBP, 13/10/2022 – 28/7/2023.
[xiv] “Multinationals Producing Five Times More Than Irish-Owned Firms, Figures Indicate,” Cáit Caden, Irish Examiner, 24/4/2023.
[xv] Source: Eurostat, as of 31/7/2023.
[xix] “French Growth Surge, Easing Inflation Give Hope to Euro Zone,” William Horobin, Bloomberg, 28/7/2023. Accessed via Financial Post.
[xx] See note xi.
[xxii] Source: FactSet, as of 31/7/2023.
[xxiii] “World Economic Outlook Update,” International Monetary Fund, July 2023.
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