Europe’s economy recovers from long illness

“Europe is no longer the sick man of the world economy,” says Jana Randow on Bloomberg. After years of stagnation caused by the euro crisis, growth is bouncing back. GDP rose by another 0.6% in the third quarter, reflecting an annual pace of 2.5% – the quickest in six years and eclipsing the US and UK’s 2.3% and 1.6% respectively. The recovery has spread to the weaker states in the south of the bloc, with Italy managing its joint-fastest quarter in seven years, a gain of 0.5%.

There is plenty of scope for more. Business investment has finally returned to 2008 levels. Surveys remain encouraging, with the bloc’s Economic Sentiment Indicator, which tracks both consumer and business confidence, at a 16-year high. It helps that global GDP growth “has finally synchronised across almost all regions and is also rising”, as James Rutherford of Hermes Investment Management notes. The eurozone is far more export-dependent than Britain or America – sales abroad comprise roughly 45% of GDP.

Despite its dependence on exports, the eurozone nonetheless managed to shrug off the recent strength in the euro, which made European products more expensive abroad. Now “the heat has come off the euro” in any case, says Richard Barley in The Wall Street Journal, so another potential headwind has dissipated. With “the growth story firing on all cylinders”, profit growth forecasts for 2017 are being revised up, while in America they are being scaled back, “a rare sight”.

Recent gains in US stocks stem from investors being prepared to pay higher valuations for stocks, not from actual earnings growth. That’s one reason the S&P 500 has jumped to a forward price-earnings multiple of 18 from 16.8 in late 2016. The Euro Stoxx 50 index of eurozone equities is on a more modest forward p/e of 15.

Monetary policy, moreover, remains extremely loose, adds Barley, and there is little sign of inflation so far. The European Central Bank (ECB) has said it will halve the monthly amount of bonds bought with printed money, but extend the programme until September 2018 and keep interest rates at all-time lows beyond the expiry date of the quantitative-easing programme.

In other words, the ECB has “opened the door further to the monetary-policy exit, while positioning itself a long way from walking through. That provides a good deal of support for markets.”

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