Three eurozone economic numbers
No one’s all that surprised that growth isn’t wondrous and roaring in the eurozone. It hasn’t been for years, and no one can think of any reason why it should suddenly have become so. However, it’s running worse than we’d generally expected, and there’s nothing to say that a corner is about to be turned.
The best advice is to simply look elsewhere for opportunities. Sure, there will always be specific situations here, as anywhere and anytime else. But from the macroeconomics, the eurozone is simply where we don’t want to be.
There is, as I’ve said before, one possible play, which is to look at real estate in some of the periphery economies.
This is best described as pretty pathetic:
Final numbers confirmed that euro zone GDP grew by 0.2% q/q in the third quarter, the same as in the second. Growth from a year earlier also held steady at 1.2%.
(Eurozone Q on Q GDP Growth from Trading Economics)
(Eurozone PMI from IHS Markit)
Or in text form:
November’s final IHS Markit Eurozone PMI® Composite Output Index continued to signal marginal growth of the euro area’s private sector. Posting 50.6, unchanged on October and slightly better than the earlier flash reading of 50.3, the index remained amongst the lowest levels in the past six-and-a-half years.
Eurozone retail sales
Our third stat today is retail sales:
Euro zone retail sales plunged by a below-consensus 0.6% m/m in October, while even more disappointing was that September’s increase was revised down to show a 0.2% decline. The details were abysmal; nonfood sales dropped by 1.1% m/m after a meagre 0.1% rise in September, with sales retreating in all of the nonfood subsectors.
There’s a growth problem here
We’ve got really rather miserable immediately past GDP growth. The immediate future as shown in the PMI doesn’t look any better. And we’ve even got this from Moody’s Analytics about that near-future growth:
We expect that the euro zone’s strong consumers will keep the economy afloat in the final quarter,
Well, yes, given those retail numbers that came out soon after they published that, it’s not looking good, is it?
What to do about it?
The problem for the policy authorities is that there’s not a great deal that can be done about this. The only unifying policy over the eurozone area is monetary policy, and it’s very difficult indeed to see how that could be made any more stimulatory. Negative interest rates are indeed possible – they must be, because we’ve got them. But there’s a limit as to how negative they can be, because at some point people will simply move into cash – when the costs of securing cash are lower than the losses from negative rates, something that seems to be pretty close to where we are now.
We could think of increasing QE, but the limitation there is that the various bonds must be bought in proportion. And given Germany’s budget surplus, there aren’t that many more Bunds that can be bought.
Fiscal policy is something still remaining with the nation states. It’s difficult to see how there would be any grand coordination there. Thus, anyone who tried reflation would just find the trade deficit soaring.
As I keep saying, I think the euro itself was a bad idea, but we are where we are. The question is, well, what next? I can’t see the various countries managing to get it together on an expansionary fiscal policy, and I can’t see monetary policy aiding much more, if at all.
So, one answer is simply to avoid the entire continental economy. Sure, there will be special situations here, as everywhere, but the macroeconomic background is simply don’t go there.
Another point though is that these numbers do certainly mean that there’s not going to be a tightening of monetary policy. And it isn’t true that all economies are equally in the doldrums.
(Eurozone PMIs from IHS Markit)
Thus, there is a strategy here. All eurozone countries are going to remain with negative interest rates and a very expansive monetary policy. Not all eurozone economies actually need this.
What’s the one sector that does well with low interest rates, those lower than the general state of the economy would indicate? Real estate. So, real estate in the peripheral economies would be sensible.
The investor view
One option is simply to shun the entire eurozone on macroeconomic grounds. The other is to look at real estate in certain periphery countries. Ireland and Spain, for example, and I would add from personal knowledge Portugal. Of course, it’s always the specifics of a house and place that matter when pulling the trigger on an investment, but the macroeconomic background does look right.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.