The Usual Suspects in Eurozone Weakness

Tuesday, the much-maligned eurozone published its preliminary, or “flash,” estimate of Q2 2012 GDP. And as analysts expected, the currency bloc posted -0.2% q/q (-0.4% y/y) contraction in the quarter. In the last three quarters, the aggregate eurozone has contracted twice and was flattish in between. Which clearly amounts to weak economic growth. But what it doesn’t amount to is a big, negative surprise—in our view, limiting the impact on equity markets of weak eurozone economic fundamentals.

Behind this quarter’s contraction stand the usual suspects. Italy posted contraction of -0.7% q/q (-2.5% y/y). Spain contracted -0.4% q/q (-1.0% y/y). Portugal shrank -1.2% q/q (-3.3% y/y). And Greece suffered another large decline in output, falling -6.2% y/y in Q2 (Greece doesn’t report quarter-over-quarter growth). While these figures clearly aren’t great, these are also basically the usual suspects.

Elsewhere, France produced its third straight quarter of flat quarter-over-quarter growth (+0.3% y/y). Positively, the Dutch posted their second consecutive positive quarterly growth. And Germany posted quicker growth than expected—rising +0.3% q/q (+1.0% y/y). For further perspective, consider that Germany—the eurozone’s largest economy—has posted only one quarter of contraction (a flattish -0.1% q/q dip in Q4 2011) since the eurozone’s travails began. Yet since the saga began, folks have been quick to note the eurozone accounts for nearly 40% of German exports—and presume Germany’s economy is soon to hit the skids. Our advice: Recent history suggests you should take those claims with a healthy dose of skepticism.

To us, the broader picture shows eurozone economic fundamentals remain largely the same as they’ve been. Which is to say, a mixed bag with quite a few weak areas. And as we’ve written here frequently, we don’t expect a quick fix to what ails Europe’s periphery. After all, Athens’ competitiveness issues weren’t built in a day—or a decade for that matter—and will likely take years to unwind. But ultimately, what’s been driving the eurozone’s travails isn’t so much the fluctuation in GDP, industrial production or retail sales. It’s more been the fear of sudden and disorderly collapse of the euro. This isn’t to say eurozone data are irrelevant—they’re clearly not. But it is to say those waiting for a cure to the eurozone’s pockets of economic weakness to turn bullish may miss the boat widely.

Essentially, stocks are a classic leading economic indicator—an imperfect look at investors’ collective expectations of economic and earnings conditions ahead. In recent weeks, as weak data have continued to emerge regarding eurozone conditions, global stocks have seemed indifferent to the negative news. Does that mean the eurozone’s impact is over? No, not necessarily. But it should serve as a warning that if you’re waiting for Greece to get its act together, you might have a long and costly wait yet to go.