Christopher Smart, Head of Macroeconomic & Geopolitical Research, identifies a few reasons why Europe’s economic future is not as bleak as it may seem.
As the Brexit saga turns more intense and Byzantine, what of Europe itself? There are plenty of dragons circling Brussels as its leaders struggle to reinforce their single market and bolster European interests in a world dominated by China and America. Amid mounting populism and falling growth, the current consensus is that Europe is headed for an unhappy year, possibly an unhappy decade.
But it’s important to distinguish between Europe’s structural woes, which may never be fully fixed, and its challenges that cycle between slightly better and slightly worse. Careful investors will note that the current headwinds making this quarter slightly worse are mostly temporary. Summer won’t bring an end to Italian populism or haggling over budgets, but it may bring better growth than current forecasts project.
The bad news is all too obvious. The global economic cycle appears to be turning on Europe while its defenses are down. The European Commission recently downgraded growth expectations across its member states to 1.5% this year from its 1.9% forecast just a few months ago.
The culprits for a darker outlook are mainly in Beijing and Rome. Chinese efforts to rein in credit growth last year have led to a dramatic slowdown in European—especially German—exports. Trade tensions with the United States aren’t helping. Policy uncertainty in Italy is dragging its economy perilously close to recession.