Our Opinion: 2014

Europe’s triple dip recession

Hamish McRae said in the Evening Standard this week that: “The notion that the Eurozone could be the new Japan did not seem realistic five years ago. Now, I’m afraid it does.”The Eurozone economy is still 2% smaller than at its pre-crisis peak. In 2011, the global recovery meant little in Europe where the Euro crisis gave way to another slump – a record, six-quarter recession.

Now, after a feeble recovery lasting only year, GDP is weakening again. Last time, it was the highly indebted Southern European that hit the headlines. Now, the triple dip recession is centered on the core economies.

August saw the fastest slide in German industrial production since 2009. Output will grow modestly in the third quarter, if at all, after declining in last quarter.

So what’s gone wrong? Anatole Kaletsky said on Reuters that the sanctions against Russia “caused a collapse in consumer confidence and business investment in the Eurozone’s one strong economy – Germany.” That has rattled confidence elsewhere. Meanwhile, the relatively strong Euro has hit export growth. Many governments’ are still cutting spending and a lack of progress on structural reform hasn’t helped.

Banks aren’t keen to lend money and households don’t seem keen to borrow either. The recent European Central Bank attempt to bolster growth by offering cheap loans was a flop. Of the €400bn on offer, only €82m was lent!

So with people scared to spend, scared to borrow, a real risk of deflation exists.

The ECB remains nervous about launching a full scale Quantitative Easing programme, although Barclays expects it in early 2015.

QE is no miracle cure. But it should trigger – finally – a substantive fall in the value of the Euro that would underpin exports, increase inflation, and buy some time. And some of the liquidity should find its way into stock markets – which remain a good bet at these reasonable valuations.

I would suggest, of course, that the best strategy for accessing European markets is in a jurisdiction well away from the Eurozone itself. That would be London.