Europe is “giving a good impression of being back as a global economic powerhouse”, says Ralph Atkins in the FT. The eurozone grew at an annual pace of 3.1% in the first quarter, three times faster than the US; the buoyant global economy has underpinned exports and business investment is growing at its fastest pace in a decade. Sentiment is strong across the board, while in Germany, which accounts for about a third of the euro area, consumers appear to be opening their wallets, with April’s retail sales growth at a four-month high. This suggests that consumption is recovering from January’s VAT hike. The OECD has just increased its German growth forecast for 2007 from 1.8% to 2.8%.
Eurozone unemployment has fallen to 7.1%, the lowest since records began in 1993. That’s not too far off what would have been a respectable US level a few years ago, according to Kevin Daly of Goldman Sachs. It shows that there has been “an important structural improvement”. Supply-side reforms, such as changes to benefits systems and work practices in Germany, are pushing people into the workforce, says Lex in the FT. Companies have also restructured, improving their competitiveness. Thanks to cost cuts and agreements with unions, German unit labour costs have fallen over the past six years. With earnings still surprising on the upside while they have been slowing in America, and valuations still reasonable – the pan-European DJ Stoxx 600 is on a 2007 p/e of about 14 – there is scope for further gains. Any material sell-off is “a buying opportunity”, says Karen Olney of Merrill Lynch.